About This Episode
Chris Barron pulls CPA Paul Neiffer aside mid-harvest for what Barron calls tax balancing rather than tax avoidance. Neiffer's core point is that losses no longer buy much. Net operating losses carry forward indefinitely but only back two years, capped at $255,000 single or $510,000 married, and they do not offset self-employment income for a self-employed farmer. So the goal is to fill the standard deduction and the 10% bracket, because unused low brackets are gone for good.
Paying children real wages is the tool he keeps returning to. A child under 18 doing legitimate farm work owes no FICA or Medicare on either side, and can earn about $12,200 federally tax-free; state tax might run $200 to $400. Children over 17 or grandchildren can be paid a commodity wage instead. Up to about $6,000 of that can go into a Roth IRA, which Neiffer says can compound into a million or two by retirement.
Two more levers close it out. Deferred payment contracts can be pulled back into 2019 income if prepaid expenses overshot and income landed below target. On estates, the lifetime exclusion is $11,400,000, rising to $11,580,000 in 2020, and it disappears in five to seven years, so families with $20 or $30 million in ground should be gifting now. He also puts trade-in equipment gains inside an LLC to keep Schedule F income usable for Social Security and retirement contributions.
“We can carry them forward forever, but now we can only carry them back 2 years.”
— Paul Neiffer
Key Takeaways
Net operating losses now carry back only two years, capped at $255,000 single or $510,000 married, and do not offset self-employment income.
Fill the standard deduction and the 10% bracket every year, because an unused low bracket is never recovered.
A child under 18 on real farm wages pays no FICA or Medicare and earns up to about $12,200 federally tax-free, with about $6,000 of it eligible for a Roth IRA.
Deferred payment contracts can be elected back into the current year's income when prepaid expenses push you below your income target.
The lifetime estate exclusion is $11,400,000, going to $11,580,000 in 2020, and Neiffer urges families with $20 to $30 million in ground to gift while it lasts.
Holding equipment inside an LLC traps the trade-in gain there, so the farmer keeps Schedule F income for Social Security and retirement plan contributions.
Full Transcript
Narrator: And it all comes down to this. Two on, two out, bottom of the ninth.
Paul
Neiffer: The Farmers lead by one.
Chris
Barron: Full count, here comes the play at the plate, and it's the Ag View Pitch! Welcome everybody to another episode of the Ag View Pitch, and today you've got Chris Barron here with a special guest, Paul Niefer, who is the farm CPA. And we are kind of in the middle of harvest, but I got Paul cornered here and I thought maybe we would have a little conversation on some year-end tax planning. I know a lot of, a lot of growers are still probably harvesting, and we may be muddling through this for a long time. And, and, uh, today you've been here on the farm kind of helping me today, Paul, haven't you? It's nice, nice and warm here today, right?
Paul
Neiffer: Yeah, well, when the wind's not blowing, it's pretty warm, but compared to last Thursday, maybe it is actually pretty warm.
Chris
Barron: Yeah, well, we're sitting here and still a lot of harvest to go yet, but I think this podcast will kind of hold the test of time for quite a while here as we get towards the end of the year and as growers think about how they want to manage their tax situation as we go into a new year. And so as we finish this year up though, Paul, let's kind of start out with, you know, you call it tax optimization. I kind of call it tax balancing where, you know, growers sometimes will get themselves into a pinch because they, you know, as farmers, we just don't want to pay taxes. And you know that, right? So, you know, what are some of the things that we need to be thinking about as growers to optimize the tax benefits that are available, but yet not get ourselves in a pinch so that 5, 10 years down the road, we got a problem. So what are some of the things there?
Paul
Neiffer: Right. Certainly we want to take advantage of, especially with families with kids, There's a child tax credit, there's a standard deduction, there's a 10% tax bracket. We always want to make sure that we fill up those brackets because 10%, once— if you don't use that 10% bracket, you never get it back. So there's many ways that we can go ahead and increase income, and we'll probably talk about that a little bit later on, even after year-end. So the key is, and especially with the new tax law, having losses really don't gain us anything. It used to be we carry those losses back unlimited and get a big refund. Well, those days are pretty much gone.
Chris
Barron: How long can we carry those losses now?
Paul
Neiffer: We can carry them forward forever, but now we can only carry them back 2 years. We used to be able to carry it back 5 years. Right. Now it's only 2 years, and you're limited. It's either $255,000 for a single. That's the absolute maximum that you could carry back, or $510,000 if you're married. So we really don't like the idea of having a bunch of losses, and again, if you're a self-employed self-employed farmer, those net operating losses don't offset self-employment income. So we definitely want to go ahead and try to fill up that, you know, let's fill up the standard deduction because that's tax-free.
Chris
Barron: Right.
Paul
Neiffer: Let's get it and fill up the 10% tax bracket because that's about as cheap as we're going to get. And if you have kids, you're likely going to get a credit to completely offset that tax anyway. And again, if you don't use it, it's sort of lose it. So definitely we want to go ahead and do that.
Chris
Barron: Tell me more about the— you mentioned kids. We've got a lot of clients that have, you know, kids under the age of 18. Is there anything there that we can be looking at?
Paul
Neiffer: Yeah, certainly if they're a self-employed farmer, you want to make sure that you pay your children appropriate wages. So if I think one of your kids made $1,500 last month driving tractor. Right. And that's very appropriate. I know when I was a kid, I was driving tractor and combine for my parents. So go ahead and make sure— treat them like any other employee of yours. Pay them the correct amount of wages. The nice thing about that, if they're under age 18, it's completely tax-free to the child up to about $12,200 at the federal level, and there's no payroll taxes. You don't have to pay FICA or Medicare on either the employer's side or the child's side. So that is certainly one That's one thing to take advantage of. And if your child is over age 17, or maybe it's grandpa, you know, paying the grandchild to come out and work for him, you can certainly pay them a commodity wage.
You know, pay them 1,000 bushels of grain. Again, that's not subject to payroll taxes, and the child can still make $12,200. And also, they could then take up to about $6,000 of that and put it into a Roth IRA. And we know if you let that child build up that Roth IRA for 5 or 10 years, when they they're younger, then when they retire they'll have $1 million or $2 million. So that's a pretty good deal too.
Chris
Barron: Oh, that'd be huge. You talked about the $12,000 for federal level. What about the state? I know every state's a little different.
Paul
Neiffer: A little different. A lot of states sort of tie it to the federal level. I'm not sure about Iowa. I think we're probably looking at most, if you had a child making $12,000, a couple hundred bucks, $200, $300, maybe $400 at the highest. But still that's gonna be a whole lot cheaper than what mom and dad are gonna pay.
Chris
Barron: Right. Right. What about, you know, we were talking about balancing the taxes or optimizing them. There's a lot of growers that I think use the deferred pay program to manage their income so that there's not too much there. They're gonna prepay some stuff, but you know, some of that management might be through deferred. Is there anything there with deferred pay that we need to be aware of?
Paul
Neiffer: Yeah, I think sometimes growers forget that, you know, deferring that grant and then they've done a whole bunch of prepaid farm expenses and maybe they ended up prepaying too much. You know, we wanted to show, let's say, farm income of $50,000 and suddenly we're $50,000 in the hole. Well, the nice thing about the deferred payment contract, we can elect to bring some of those contracts back into income in 2019 and get our income back up to that $50,000 level, which is where we want it to be.
Chris
Barron: Okay. All right. What about some other things that, you know, we haven't really touched on that I think people are dealing with at almost every age, probably, on estate planning? You know, anything new or things that we should be paying attention to on that?
Paul
Neiffer: Yeah, definitely. Tax reform really didn't have any new items on estate planning except for one item, and it was just one, but it was pretty key. And that's that the lifetime exclusion amount that a person could be worth either during lifetime or during their estate has been doubled. It's now $11,400,000, and in 2020 it'll be $11,580,000. But that disappears here in about another 5 or 6 or 7 years, and if we get a change in Congress and a change in the presidency, it may disappear in a couple years. So if you're a farmer out there, especially a farm family that knows the next generation is going to be farming the ground, and let's say they have some farm ground with $20 or $30 million, which, you know, in central Iowa, that's not a lot of acres, 2 or 3,000 acres maybe.
They really should be looking at doing some major gifts right now, and especially the farmland, because we can't depreciate that farmland. We don't get any extra tax deduction, and that step-up in basis that we normally worry about when somebody passes away, because we can, like equipment and grain, we can step that up to fair market value and deduct deducted all over again. Well, farmland doesn't really gain us that. So really they should be looking at making, taking advantage of that extra $5 or $6 million for dad, $5 or $6 million for mom, make those gifts to either to the kids, or I should say the grandkids.
Chris
Barron: Right. Okay. Is there any other things, you know, I mean, on the tax side of things, people are busy. We're trying to get a lot of stuff done here right now.
Paul
Neiffer: Anything? I just jotted down a note here. It's actually, it's sort of interesting. I was doing a new column for Top Producer magazine and I sort of entitled, "Help, I Have a Butt Ugly Tax Return." Well, they got rid of the word butt. You know, now it's, "Help, I Have an Ugly Tax Return." So there'll be a column on that. You know, a lot of farmers now when they're trading in farm equipment, that's become a taxable event. And if they're trying, especially older farmers, they're trying to maximize their Social Security benefits and get some extra Social Security income. Well, that income from selling farm equipment doesn't gain— it isn't subject to self-employment tax, so they end up having a large Schedule F, and then they have a large amount of income over on 4797 that they can't use. They can't put in a retirement plan contribution.
So what we're doing in that case is one idea is they— and we've talked about this before, especially with the next generation— have that equipment inside of an LLC.
Chris
Barron: Right.
Paul
Neiffer: We trap that gain, we trap that depreciation inside of that limited liability company. Company, and then that way the farmer's still allowed to go ahead and pay into Social Security if they want to, right? Go ahead and make a retirement plan contribution. And then one other thing I wanted to bring up for those farmers that have younger kids at home, and let's say they're breaking even this year, there are certainly a way of increasing the income a little bit, maybe doing some type of grain wage to their spouse that maybe is staying at home to take care kids, you know, not working. And by doing that, if they got 2 or 3 kids, we could probably easily get them a $6,000 to $8,000, maybe even a $10,000 refund, whereas if they just simply showed a small loss, they get nothing at all.
So that, that's something that, again, I had a column in Top Producer magazine on that a couple months ago that I would certainly recommend them take a look at that. Okay.
Chris
Barron: All right. Well, I, I think, you know, this is kind of a quick and short and dirty, um, conversation on year-end tax planning. But I think, you know, we can get back together here. You know, as we're recording this right now, a lot of growers are still in the heat of harvest. And, you know, if you're in the combine or out running around and stuff and got a minute to listen to a podcast, we just kind of want to get some initial information out there. And we'd ask a lot of our listeners, if you have questions, please reach out to you, Paul. How do they best get ahold of you?
Paul
Neiffer: A couple ways. My email is paul.neifer@claconnect.com, or they could send it to my personal email, which is just pgn, Paul Gary Nancy CPA, @gmail.com. Or they can call my, they can certainly call my cell phone, 509-961-9739.
Chris
Barron: Okay. Well, thanks, Paul. You're, that's one thing I'll say about you is you're very accessible. Yes. And the great thing about you is you understand ag, you understand what's going on with the farmers. You understand, you know, what it is we need and what it is sometimes we don't need.
Paul
Neiffer: So, hey, we were just out cleaning out some nasty beans out of an auger. So yeah, no, I grew up on a farm.
Chris
Barron: Oh yeah. Oh yeah. So it's, it's great that, that you're helping growers like you are. And thanks a lot for your time today and thanks for everybody listening. And again, if you have questions, please email either Paul or myself and, and we'd be glad to address those specific questions or bring them up in another podcast on year-end tax planning. So thanks everybody for listening., and we'll catch you again next time on the Ag View Pitch.
Narrator: Thanks again for listening, everyone. If you would like to hear more content from Ag View Solutions, listen to our other podcasts such as Dad's Wisdom or our current Harvest Series. Ag View Solutions works as an integral part of operations like yours, side by side for farm profit management, business collaboration and structuring, facilitating industry-leading peer groups, and coaching and consulting tailored to your farm's unique needs. We know that no two farms are the same, and we are here to help make your farm be the best it can be. You can learn more at agviewsolutions.com, email us at agviewpitch@gmail.com, or call Chris Barron at 319-533-5703. We really look forward to talking with you.