About This Episode
Paul Neiffer, a principal with CliftonLarsonAllen and a Top Producer columnist, walks Chris Barron through the three moves that carry most year-end farm tax planning. Deferred payment contracts push sold grain into January or later, but only when the paperwork is right, and he mentions a tax court case working through the system over contracts written by large merchandisers. Prepaid inputs and capital purchases round out the list, with 100 percent bonus depreciation available on new or used equipment and on a new shop.
The prepay rules get the most detail. A check to the local co-op for a round number is a deposit, not a prepayment. The invoice has to name the product, the quantity, the price per unit and the extension, exactly as if delivery had happened, though the seed can still sit in the dealer's warehouse. Prepaid amounts also cannot exceed 50 percent of total other farm expenses. Get it wrong in an audit and the deduction slides to the following year, plus a 20 percent penalty on the tax involved.
On 2020 aid, Neiffer separates yield damage from price damage. Crop insurance and disaster damage payments can be deferred a year if the operation normally sells more than half its crop after harvest, and livestock death loss can go into a 1033 election for longer. CFAP and MFP are price-based and stay taxable in 2020. He advises waiting until early 2021 to request PPP forgiveness so expenses can be chosen deliberately, and he expects Congress to restore deductibility of those expenses.
“The bonus depreciation is not an extra deduction, it's just simply a timing of the deduction.”
— Paul Neiffer
Key Takeaways
Prepaid inputs cannot exceed 50 percent of total other farm expenses, with room to go higher if acres grew substantially.
A qualifying prepay invoice must show product, quantity, price per unit and an extension; a lump-sum check reads as a deposit.
Losing a prepay deduction in an audit moves it to the next year and adds a 20 percent penalty, about $10,000 on $50,000 of tax savings.
Crop insurance and disaster damage payments can be deferred one year if you normally sell more than half the crop after harvest; CFAP and MFP cannot, because they are tied to price.
Bonus depreciation is 100 percent on new or used equipment, but Neiffer calls it timing rather than an extra deduction, and estimates about half of equipment buying is tax-driven.
Separate equipment or trucking entities need real invoices and actual cash transfers, and the structure has to match FSA rules on equipment rent versus custom farming.
Full Transcript
Paul
Neiffer: And it all comes down to this. Two on, two out, bottom of the ninth. The Farmers lead by one. Full count, here comes the play at the plate, and it's the Ag View Pitch!
Chris
Barron: Welcome everybody to another episode of the Ag View Pitch, and today we're gonna have a little conversation around tax planning at year end. And we're getting close to year end, and we've got Paul Knefer. And Paul, go ahead and introduce yourself and let's get started. How's it going?
Paul
Neiffer: Yeah, good, good. Paul Niefer, I'm a principal with CliftonLarsonAllen, also write a column for Top Producer magazine and, and, and own some farmland in Iowa that Chris and I were just talking about starting to lock in some prices for next year.
Chris
Barron: Yeah, it's starting to, at least as of the day we are recording here, we can make some sales probably in the black and maybe the price going to continue up, but we got to get started at some point, don't we?
Paul
Neiffer: Exactly, exactly. Anytime we can be in the black as a farmer, uh, you know, something we probably should shoot for.
Chris
Barron: Yeah, definitely. At least get started anyway on some 2021 sales. So, but I guess today, today our topic is, you know, with you being the, the farm tax expert and the foremost person in this area that I've ever met that really pays attention, really focuses on these things and works with a lot of farm CPAs across the country, What are some of the key things that you're seeing that growers need to be focused on as we get toward the end of the year? And then we'll kind of dive into some questions as well for you.
Paul
Neiffer: Well, I think we have our normal— let's go over the normal tax planning tips that we have toward year-end planning. The one thing that we really like is what we call deferred payment contracts. That's where the grower has actually sold their crop. That's the key. They've sold their grain or whatever it might be, but instead of getting paid this year between now and this end of this year, they're actually going to be paid in January or February or sometime in the future. Now we need to make sure that those contracts are done right. Matter of fact, we heard last week there's a sort of a tax court case, I think, winding its way through the system where about $50 to $100 million of these contracts, and they were done by the larger merchants out there, Bunge or ADM or whatever. Really weren't done as well as they could have been. So definitely deferred payment contracts.
And then farmers also know about prepaid farm expenses. I was doing some tax planning last week for— with a couple of my farmers. And, you know, they're going to prepay their corn and their soybean seed, they're going to prepay some of their chemicals, some of the fertilizer, fuel, propane, whatever it might be. And again, those need to be done right too. You can't simply do a what's called a deposit. You can't, hey, write a check to the local cooperative or farm input dealer for $50,000 and think that's going to fly. Matter of fact, we're going through an audit right now, one of our clients, and that's one of the issues is that their documentation wasn't very good. And then I'm seeing, I'm starting to see farmers upgrading their farm equipment. And we know that under bonus depreciation right now, farmers can deduct 100% of whatever they purchase on the farm other than farmland.
So if they're building a new shop, that's 100% deductible. If they're buying a new combine or a used combine, doesn't matter whether it's new or used, that's 100% deductible. Now, do we want to deduct 100%? You know, we may actually wanna stretch that depreciation out because if you're borrowing money, you know, the bonus depreciation is not an extra deduction, it's just simply a timing of the deduction. So those are the three, probably the top three things that we typically look at when we're dealing with farmers and year-end tax planning is, you know, prepaying those farm expenses, deferring income, or the ability to defer income into 2021, and then maybe going ahead and making some of those larger capital improvements that enhance the farm profitability but also create a tax deduction.
Chris
Barron: Okay, so what I'd like to do then is go back and we'll start with the deferred pay with a couple of specific questions, and then we'll work through prepayment and the equipment component of those 3 things that you're talking about. So first of all, with the deferred pay, one of the questions I have there is as it relates to crop insurance income, the WIP+ payments, and we talked a little bit offline, you mentioned that there's a lot of disaster payments going out in a lot of different counties. How are those income streams handled, and is there a way to defer any of that, or does that all have to be taxed in the current year?
Paul
Neiffer: Well, it depends on the, depends on the type of payment. So crop insurance, as long as your normal practice is that you sell at least half of your crop in the year after harvest, so the, if you're normally selling more than 50% of your crop that you harvested just now in 2021, you're allowed to defer that crop insurance for 1 year. So instead of report, you report it this year, but then you elect to defer it into 2021. It has to be related to damage associated with yield damage. It can't be related to price, but we know most of the crop insurance proceeds they're receiving this year had nothing to do with price. There really wasn't a price component. It was primarily a yield or a damage component, so that should be allowed to be deferred.
Now over on the WIP+ side, again, if your normal policy is that you would defer those sales into, into the following year, you're going to be allowed to defer those damages, that portion of that payment related to those damages. If you're a livestock producer and you had some excess death damage that was reimbursed by either the LIP program, Livestock Indemnity Program, the WIP+ program, and so on, those extra sales due to the death loss, quote unquote, are allowed to be deferred too for 1 year Or you can elect to do what we call a 1033 transaction where you can actually defer those for maybe 2 or 3 or 4 or 5 years depending on the situation. Now if we're talking CFAP payments, those are more related to a price damage. So you're not gonna be able to defer the CFAP payments. If you got some MFP payments toward the beginning of 2020, those cannot be deferred either.
'Cause again, that was all related to our— price mechanism. It had nothing to do with, with damages other than the early on the CPAP related to where you had crops that you normally would sell, that there was damage in the field or whatever. But again, you typically wouldn't be deferring those sales into the following year. So most cases, all that CPAP money is going to be taxable in 2020 if you received it in 2020.
Chris
Barron: Okay, I have a specific question on some of the relief packages that occurred during 2020, and specifically the Paycheck Protection Program, the PPP. What about that? Because that, that's a little dicier, isn't it? Because that was designed to come in and offset an expense that you had. So how's that work?
Paul
Neiffer: Yeah, well, right now, that's a good question, Chris. I'm going to tell you, uh, here's the answer we know now, but it may change within a couple weeks, and I'll I'll let you know what I mean by that. Right now, if you get the loan forgiven, which most farmers are gonna get their loan forgiven, that forgiveness is tax-free. However, the IRS came out with a notice back earlier this year and then they just doubled down on it last week. Well, a week ago Friday. Yeah, a week ago yesterday, indicating that if you know or likely are going to get forgiveness, you're not allowed to deduct any of those expenses on your 2020 tax return. So that's negative news. That's not the news we wanted. Now what I'm saying by, you know, sort of going back to Aaron Rodgers a few years back, the Green Bay Packers, when they had a losing streak going on and his comment to the audience was relax.
And I'm going to say right now, let's relax a little bit because I think Congress, you know, probably as part of their budget bill that they have to get passed by December 11th, I'm hoping, is going to put a provision there that indicates those expenses are deductible. So right now, the law according to the IRS is that those expenses are non-deductible. I think Congress is gonna fix that. We've heard both the House and the Senate want to go ahead and correct that, so I think that's going to happen. Now, I can't guarantee it, but I think it's definitely going to happen.
Chris
Barron: Okay, so that's one where standby, we'll be back with more information later on that one. And if anybody has questions— —Exactly, right.
Paul
Neiffer: Yeah, once, once we get that, I will certainly be posting on the blog probably 2 or 3 times, hey, we don't have to worry about this anymore. And we're still a firm proponent of deferring asking for forgiveness until early 2021. And the reason we like doing that is because that allows us to decide what expenses, if in fact they're not going to be deductible, there's a benefit in some cases for farmers to pick and choose certain expenses to, to elect for forgiveness versus other expenses. Like if a farmer sells a lot of commodities to a cooperative, putting all the labor costs down actually will help them on increasing that Section 199A deduction. So there's really no hurry. You have 10 months after the end of the 24-week period to actually ask for forgiveness. So I've been telling most of our clients, whether they're farmers or not, you know, just hold off.
You know, you can apply for it in January or February, and especially for farmers, because a lot of the banks, they're going to be looking at the Form 943, which you're not going to file until January of 2021. So, so we'll see what happens there.
Chris
Barron: Okay, I think that pretty well covers the deferred pay discussion and the income on some of those aid packages. Is there anything there that we didn't hit?
Paul
Neiffer: No, I think, I think we covered most of that. You know, the key is on crop insurance type or disaster type. You know, your normal policy was that you sold grain in the year after harvest, at least 50% of your grain after harvest. Now you don't have to do that every year, but definitely the majority of the years you'd have to do that. Gotcha.
Chris
Barron: Okay, next on your list of 3, the deferred pay, the prepayment, and equipment purchasing. Prepay next. I have a question there. You know, you made a comment, and to me it's a fuzzy area with farmers who prepay. So it's, it's pretty evident. Let's— I'm going to give you a couple specific examples and then lead to a question. But as a producer, we go out, we buy fertilizer, the fertilizer gets applied, and we pay for it, and it's for the next, obviously potentially the next crop or the next two crops, whatever. And that's legit. Let's say that we prepay for some crop protection or we prepay for some seed and we have full intention of taking delivery and we plan on it and we will, but we write a check on, you know, December 28th and the seed inventory is still at the warehouse of the seed dealer Is that count or does that not count?
Paul
Neiffer: That, that's still okay as long as the invoice indicates, hey, we are, we are committing to buy, you know, let's say 400 units of whatever hybrid it might be at this dollar per unit with an extension. It's perfectly okay that it's still sitting at the warehouse wherever the seed dealer's at. That, that's fine. That's a qualified prepaid expense. What you don't want to happen is you don't want to have something that just simply says, um, $40,000 for seed. No, you need to have a breakdown of what are you buying, what is the quantity that you're buying, what's the price per unit that you're buying, and then an extension. I mean, it needs to really look like an actual invoice as if you'd taken delivery of that seed or chemical or fertilizer. So if it doesn't show that and you get audited, that's the key.
If it doesn't show that and you get audited, the IRS can come in and wipe that out. And essentially what happens then is instead of getting the deduction in 2020, you're gonna get the deduction in 2021. And some people are saying, well, that's not a big deal 'cause I'll be able to deduct it in that following year. Maybe I'm talking an interest charge. Well, what the IRS does in almost every one of those cases, they're gonna assess a 20% penalty on top of it. So whatever your tax was, let's say your tax savings was $50,000, you're gonna have to pay an extra $10,000 penalty to the IRS. So that's why it's important to make sure you get it right. So the key is identify, okay, identify the, what you're buying, identify the quantity you're buying, identify the price per unit on that. Commodity, whatever it might be, your input, and then have an extension. So it looks just like a real invoice.
Yeah. Now, as far as what they actually deliver, you know, it might be a little bit more, it might be a little bit less. You know, that's going to be okay as long as that all gets delivered sometime within that year, you know, within that next year. Yeah. Okay.
Chris
Barron: So that answers that question. Basically have an invoice. The next question I have that, you know, that's specific to the products that you are prepaying for. The next question I have with prepay though is talk a little bit about the limit of the prepay. And so, you know, can you prepay 100% of your next year's expenses? Obviously not. So what is the percentage that you can go to that in an audit they're not going to have a cow?
Paul
Neiffer: Yeah, the answer is typically you only prepay up to 50% of total farm expenses. So you add up all your total farm expenses The amount that you prepaid can't be greater than 50% of that number. Now there's certain adjustments. If you added in a whole bunch of new acres, you know, you went from 5,000 acres, now you're at 10,000 acres, obviously you can prepay more. So that's allowed. But that's the general rule is that you can't go over 50% of total other farm expenses, so to speak. Okay.
Chris
Barron: Got it, that answers that question. Okay, last one. You talked about you're starting to see more and more machinery and equipment purchasing, the bonus depreciation is 100% on whether it's new or used. What do you tell producers from your perspective, and this is speaking now as a farm business ag consultant that looks at the balance sheet, we look at the needs versus the wants, which our partner Randy talks about a lot. You know, there's needs, wants, and wishes. And you know, so is it a justifiable purchase? I mean, you can buy anything and deduct it, but it also needs to be a justifiable purchase within the business as the business, you know, either grows or continues from a prioritization standpoint. What's, what's your thought there? I mean, what do you see?
I mean, do you see most producers making justified decisions, or are there some, you know, I don't want to pay tax decisions out there?
Paul
Neiffer: Yeah, I, I'd say it's about 50/50. I think a lot of them, 50% or plus or minus, is because they really need to upgrade their fleet, or they have a reason. Hey, I don't like paying repairs. I just need to have that newer equipment so I don't have the repairs. I don't have really any hired people that can help me with the repair side. Of course, these days, who knows if you can even repair a combine because of all the technology and so on. And then the other 50% is, hey, I'm buying this piece of equipment because I know it's going to save on my taxes. Now, what they sometimes forget, yes, it'll save this year, but suddenly you got an extra $75,000 payment, principal payment in the next year and the year after. The year after, that you have to generate taxable income in order to pay that off.
So they get on that, you know, they get on that, you know, that continual wheel of, hey, we got to keep buying equipment because, you know, we need to buy more equipment this year to pay the taxes that we deferred from the previous year. So it's just a combination of some people do it because it really needs it for the farm operation. Other do it because we really want to save on taxes. Gotcha.
Chris
Barron: So those are the kind of the 3 normal things you brought up. Last thing I want to bring up is something that we continually run into, and I didn't forewarn you on this, I just kind of thinking of it now, but it's one of the key questions, and I'll be doing some podcasts on this that we're getting from a lot of producers across the country and in Canada. Some is transition planning to the next generation and some of the upcoming potential laws, you know, at this point it looks like a new administration with probably a whole new set of tax law and things coming down the pike. Any, anything that you see right now that a producer could be, should be thinking about if they're in the midst of a multi-generational operation?
Paul
Neiffer: Yeah, I, I think I was concerned if we got a, a major transfer of power that farmers really should be looking at, uh, or the wealthier farmers out there that got quite a bit of net worth tied up in either land or in the farm operation should have been thinking about doing some gifts before year-end. Now I'm not quite as concerned because, hey, we know the House is very slim Democratic majority. The Senate probably will still be Republican 51-49, 52-48. Could go 50/50, but I think with the Senator from West Virginia, he's probably more of a Republican than, than some of the Republicans are. I just don't see, I, you know, I just don't see a strong impetus to make major tax changes right now, especially with the pandemic still going on. I think there's other things that Congress is going to be wrapped up with.
Um, although we've seen, you know, talk, hey, If the Republicans want to do something on taxes, then we want offsets on, you know, our other pet projects that the Democrats want. So I think we're in better shape than I thought we were going to be. Um, you know, I think if you're really dealing with succession planning right now and you know, hey, whether we do it now, for sure it's going to happen the next 5 years, I would definitely be pushing to get it done now. Versus, you know, trying to wait another 3 or 4 years. Cause eventually we know, I think they're going to have to come up with some taxes to help pay for all this stimulus we've done, unless we're really looking at inflation, which we might be. I think that's the one thing that politicians like to do. They like to see inflation cause it allows them to pay off debt with cheap dollars. So we'll see what happens there.
But yeah, I don't think I don't think there's anything— well, I shouldn't say anything. I just don't think there's as much as a push to do it now as if the Senate had gone 52-48 Democrat, the House had picked up another 20 seats of Democrats. Yeah, I'd be saying, "Hey, you better be making gifts right now." But I think we're okay.
Chris
Barron: Okay. I always have a last, last question. I've done that in the last several podcasts, it seems like.
Paul
Neiffer: You sound like Columbo, the old TV detective Columbo, you know.
Chris
Barron: So yeah, exactly. So my last, last question is business structure, another question we constantly get from producers. And it's an area we've worked with growers probably the last 10 years on just structuring a machinery and equipment company, a trucking company, and isolating these things partially for liability. And in a lot of cases, that's the primary driver for it. But then The external and probably even more important benefit to those things are clear accounting and really clean information from one entity to the next as far as your cost of production on trucking and machinery, which is the second largest line item expense that we all have. Any advice there, anything that you would— that you're seeing, um, that producers should be doing that have structured— and we have a fair amount of listeners that we've worked with on this podcast.
Any advice or anything, you know, between entities that they need to pay attention to as they wrap up year-end?
Paul
Neiffer: Well, I think there certainly are 2 or 3 key things you need to be aware of. One is if you do have an equipment company or a trucking company, you need to really run it like a business. You need to be doing invoicing or coming up with some type of structure So when that equipment company provides items to the farming entity, you know, you get an actual transfer of cash. You know, you're creating an invoice, you're writing a check. Secondly, the one thing I think sometimes we forget about is when you're setting up these entities, you may treat it all mentally, you think, hey, it's all one farm operation. But when you're dealing with the FSA, to them those are separate legal entities and you need to do it correctly.
So on, on machine rent, you might treat it as, hey, I'm really doing custom farming, I'm going to treat as custom farming, whereas the FSA wants it to make sure that it's structured as equipment rent because equipment rent is okay versus custom farming. Now I'm not saying that's correct, I'm just showing that as an example as to how you need to structure these so that you make sure that you still continue to maximize your farm payments. So That's probably two key things. On the liability side, you really need to run it as a business. You need to do the invoicing and so on. Then over in your FSA planning, you really need to be careful to make sure that the structure of your payment stream doesn't screw up your payments that you're going to be entitled to at FSA. Exactly.
Chris
Barron: Hey, I think this was a great conversation.
Paul
Neiffer: Anything I didn't ask that I should have brought up? I think, I think you've pretty well, we've pretty well covered, uh, you know, Farm Taxes 101 here in tax planning. So I think, I think we're good. Yeah, for now anyway.
Chris
Barron: So last, last, last question. If anybody needs to get a hold of you, how's the best way to reach out or to look you up, or if they have a specific question with regard to their operation as they finish up their tax planning, what's the best way to reach out to you?
Paul
Neiffer: I would say there's about 3 ways. Emails, I like emails because it allows me to respond in writing and so on. So my email is paul.neiffer, so N-E-I-F-F as in Frank, E-R, @claconnect.com. If you don't remember that, just go to our blog, farmcpatoday.com, and you'll see my email right there on when I do a post. They can also call me. They can call me either on my cell phone, 509-961-9739, or they can call my direct line, 509-823-2920. So those are probably the easiest ways, or they can text me. I think, Chris, you and I, we probably text more than we almost talk at times. Yeah. Because these days, voicemail tag is just the worst thing. And usually the texts is, Hey, let me know when's a good time to talk. So yeah, exactly.
Chris
Barron: But I'm pretty easy to get a hold of. All right, perfect. And hey, Paul, uh, really appreciate that. And for all the listeners there to understand, you know, um, you know, Paul puts in— that you put yourself out there. I mean, you, you are— you're passionate about production agriculture, you're passionate about helping producers make better decisions. And speaking for all the listeners, we all as producers really appreciate it. Paul, thanks a lot. Oh, thank you. You bet. And thanks for, uh, all your talk today. And I'd like to thank all the listeners again. If anybody has questions or comments, other information you'd like to hear, please let us know. Look forward to talking to you again, and thanks for listening to the Ag View Pitch.