Thanks for your article on exit strategies for farming (June Taxlink "Minimizing Taxes Takes a Plan"). This is my last year farming. I am currently working with a foundation for disposal of my machinery which otherwise would have triggered $1 million in income taxes. My question relates to gifts of grain donated to a Charitable Remainder Annuity Trust. Does it have to be year-old grain with zero basis or can it be current grain?
Good news: When the transfer of inventory is to a charity, current-year unsold grain can be transferred, as well as prior-year grain. There is a special regulation in the charitable area of the tax law that allows a business to deduct all expenses related to inventory, even if the inventory is given to charity in the same year.
By contrast, if you were to make a gift of grain to a family member, it would be necessary to use prior-year crop where all expenses had been deducted and your tax basis is zero. If you give current-year inventory to an individual, the current-year costs of raising that portion of the crop are disallowed and added to the basis of the unsold grain given to the recipient, increasing the complexity. For example, giving 1% of current-year corn crop to a family member would require 1% of the current-year costs of raising the corn to transfer to the donee as tax basis in the corn. But with a charitable recipient, this does not apply.
[As you know, retirement is a major tax event for farmers, but pre-planning can avoid much of the tax havoc. Join Andy's tax partners from CliftonLarsonAllen LLP for a DTN University four-hour workshop on tax strategies for retirees Dec. 6 in Chicago, just before the DTN Ag Summit. See http://goo.gl/… for details or call 888-576-9881.]
I am about to retire and have a large amount of equipment to sell. I am thinking of renting some of the larger pieces of equipment to a local farmer until my depreciation runs out. At the end of the rental time, the farmer can buy the equipment at its lower value. Is this possible without causing any income tax problems or recapture of the depreciation?
As you recognize, selling machinery requires all income to be recognized at the point of sale under "depreciation recapture" rules. Even if you finance the sale and collect over a period of years, all of the income is taxable up front and is ordinary income.
Your strategy is solid. The rent you collect is ordinary income, and you will have deductions for any remaining depreciation. When you do eventually sell the machinery after the lease years, the gain will also be ordinary income due to the depreciation recapture concept. But at that point, the value of the machinery is greatly diminished. The effect of your strategy is to spread out the income over a period of years, rather than spike up a large amount of ordinary income now upon sale.
You are dealing with an unrelated party, so that helps to keep the economics in line. Make sure that your two arrangements, the lease and the later sale, are independent events. The rental rate should be reasonable for the age, condition, and hours of use. The eventual sale price, of course, should reflect the going market for used machinery. If you were to tie the lease deal with the buy-out at the end and if the combination of numbers looks like a financed sale of the equipment, the IRS could collapse it as a taxable sale up front. And one final caution: Equipment leasing net income is generally subject to the self-employed Social Security tax.
I am aware that the Affordable Care Act has a very expensive $100-per-day-per-employee penalty if I reimburse my employee health insurance premiums or provide a medical reimbursement plan to my workers. But I provide a group health insurance plan, and I understood I would not face this penalty. But now I am reading something about not having a summary plan description could cause this penalty?
A Summary Plan Description (SPD) is a document an employer provides to each employee that describes the general terms of a health plan or similar fringe benefit. This form is required by the Department of Labor, not the IRS. If you have an insured health plan, the insurance company generally provides the document when the employee enters the plan. A new SPD is only required every five or 10 years, depending on whether the plan is amended. The penalty associated with this form relates to failure to provide the form upon the request of the Department of Labor.
There is a new form required by the Affordable Care Act known as the Summary of Benefits and Coverage (SBC) that probably was the focus of the material you read. This document describes the health plan using Health and Human Services Guidance guidance. The regulations require the health insurance issuer to provide the SBC form to the plan administrator, who in turn provides it to the employees. There is a $1,000 penalty for each willful failure to furnish the form. In addition, the IRS can impose the $100-per-day-per-employee penalty, but there is an exception for an employer who provides health coverage solely through an insured plan and has at least two but not more than 50 employees.
In summary, you are probably exempt from the SBC. But if you are a small employer offering group health insurance together with a reimbursement arrangement, you should consult with your health insurance provider regarding the reports that are to be furnished to your employees.
Editor's Note: Andy Biebl is a CPA and tax principal with the firm of CliftonLarsonAllen LLP in Minneapolis with more than 40 years of experience in ag taxation, including 30 years as a trainer for the American Institute of CPAs and other technical seminars. He writes a monthly column for our sister magazine, The Progressive Farmer. To pose questions for future tax columns, e-mail AskAndy@dtn.com. Subscribers can find all of Andy's past articles under News Search.
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