It has been a wild year. Flooding and unplanted crops, trade disputes, African swine flu. Not to mention another round of Market Facilitation Program (MFP) payments. It's one of those years you should be watching the markets.
Speaking of market facilitation payments, I'm just reading over the release. Sign-up started July 29 and runs through Dec. 6. The first of three payments will be the higher of 50% of a farmer's calculated payment or $15 per acre. The money should have started arriving in mid- to late-August. Luckily, MFP payment limitation has increased to $250,000 per person/entity. And, let's not forget the agricultural risk coverage (ARC) and price loss coverage (PLC) elections coming up. Making the proper election could result in larger payouts.
So why am I rambling? I have the slightest bit of optimism it might be a relatively good year. Some farmers didn't receive the 2018 market facilitation payment until January. With another round of payments, plus better commodity prices, farmers might have an income issue for the first time in years. Also, farmers are taking this opportunity to liquidate their commodities and livestock, and retire.
If you stopped tax planning, it's time to start again. Tax planning has grown increasingly complex with the new tax laws. It is good to review your projected income and tax-deferral strategies. And, if you dug yourself a hole with negative capital accounts or negative 199A, you need a strategy to get back to even.
A good tax plan helps to level income in the current tax year and position for tax opportunities in the future tax year. Some tax opportunities are not retroactive. Farmers needed to get everything set up before the transaction in order to receive the tax benefit.
If you are planning on exiting farming, the IRS has provided some great tools. Besides looking at installment sales and charitable remainder trusts, we are now using Opportunity Zone and Delaware Statutory Trusts (DST). Although Opportunity Zone and DST can be used with active farm operations, I'm going to focus on exiting farming.
If you are exiting farming and generate income subject to capital gains, you can invest some or all of the income into an Opportunity Zone Fund. This is unique because other tax deferrals require you to invest 100% of the proceeds (1031 Exchanges). An Opportunity Zone allows you to pick how much you want to invest. The capital gains tax is deferred until 2026, at which time you can receive up to a 15% basis increase. At the end of 10 years, any appreciation is tax-free.
Another exit strategy is the use of a DST. A DST is essentially a 1031 Exchange into a business, typically commercial real estate. Unlike the Opportunity Zone, the entire proceeds have to be invested in the DST. However, one nice benefit is once the DST investment closes (typically six to 10 years), you can roll it tax-free into another. This provides long-term deferral.
One word of caution: Make sure you get professional help. Like all investment opportunities, there are both good and bad Opportunity Zone Funds and DSTs.
Editor's Note: Tax Columnist Rod Mauszycki, J.D., MBT, is a tax principal with CLA (CliftonLarsonAllen) in Minneapolis, Minnesota. Read Rod's "Ask the Taxman" column at about.dtnpf.com/tax.
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