by: Larry Gearhardt, OSU Income Tax School Director
With the end of the school year, many students will be heading home for the summer. The additional help on the farm will be welcomed. Most times the help is free. After all, you provide free room and board, right? But there may be tax advantages, at least from a family perspective, if you “hire” your children to work in the family business.
INCOME SHIFTING: Regardless of how a business is organized, its owners may be able to shift some of their high-taxed income into tax-free or low-taxed income by employing their children. For the children’s wages to be deductible, the work done by the children must be legitimate and the wage must be reasonable for the work. The standard deduction for an individual is $6,100 in 2013. This means that your child can earn up to $6,100 before he/she incurs any tax liability. The amount that you pay your child reduces the parent’s income which is taxed at a higher rate.
ILLUSTRATION: Let’s say that Fred Farmer, who happens to be in a 33% tax bracket, hires Fred Jr. to work on the farm for the summer, and pays him $6,100. If that $6,100 had remained with Fred Farmer, he would have paid $2,013 in taxes. Instead, Fred Jr. receives the money tax-free because of his standard deduction. The family unit saves money. Even if Fred Jr. earns more than $6100, family taxes are reduced because Fred Jr.’s beginning tax rate is 10% instead of the 33% paid by his father.
CAUTION: The ta... Read More »
OSU Extension is pleased to announce a series of farm management webinars to be held in the upcoming two months. These webinars are designed to deliver current educational information for farmers, landowners, and other interested participants. There is no pre-registration required for these webinars. Just log on from the comfort of your home or business! Attend all or any of the meetings by logging on to: http://carmenconnect.osu.edu/ohioagmanager. The following is a description of the upcoming webinars.
Financial & Tax Implications of Oil & Gas Leases - Wednesday, March 13, 2013, 7:00 p.m. – 9:00 p.m.
David Marrison, Associate Professor & OSU Extension Educator, will be the featured speaker for this webinar. Don’t get caught blindsided by the taxes which will be due from signing an oil & gas lease. Learn how the IRS handles oil & gas payments. Learn which payments are subject to ordinary income taxes versus capital gain; about the percentage depletion deduction; and how signing a lease may affect your CAUV status. Learn what questions to ask and receive financial planning tips for managing the potential income from these wells.
Navigating the ACRE/DCP Decision in 2013 – Monday, March 18, 2013, 7:00 p.m. – 8:30 p.m.
Chris Bruynis, Assistant Professor & Extension Educator will be the featured speaker. With the passage of the 2012 American Taxpayer Relief Act, Congress extended many provisions of the 2008 Farm Bill. Farmers now ca... Read More »
by Larry Gearhardt, OSU Income School Director
Some landowners in the oil and gas drilling area of Ohio may receive two real property tax bills for the same property. How can this happen? When the mineral interests are separated from the surface, the Ohio Revised Code (section 5713.04) requires the county auditor to list and value the land in separate entries, specifying the interest listed, and tax the parties owning the different interests. If the same person owns both the surface and the separated mineral interests, he may receive two property tax bills. This has surprised some landowners after the separation of the mineral interests.
WHY WOULD A LANDOWNER SEPARATE MINERAL INTERESTS BUT RETAIN OWNERSHIP?
Some landowners are taking the proactive step of separating the mineral interests from the surface for succession planning and tax management. It is not uncommon for a trust to be used. When we say that the landowner retains ownership of both the surface and mineral interests, we are also including the scenario where the mineral interests are separated and placed in a trust for the benefit of the surface owner. Each landowner has his own reason for doing this, but one reason is that it may provide flexibility when doing succession planning.
ONE LANDOWNER RECEIVING TWO PROPERTY TAX BILLS HAPPENS IN ONLY RARE CIRCUMSTANCES
The focus of this paper is on the very narrow circumstance where a landowner separates the mineral interests from the surface, by deed, and ret... Read More »
By Larry R. Gearhardt, Director of OSU Tax School
The depreciation deduction (usually MACRS method) for assets used in a trade or business has always been very important to farmers when preparing their income tax returns. In addition to MACRS, the “fiscal cliff” legislation, passed early in 2013, allows two additional cost recovery deductions in the year a depreciable asset is placed in service. Click here to view the IRS news release on the fiscal cliff changes to depreciation.
First, Code Section 179 allows the entire cost of qualifying assets to be deducted in the year they are placed in service, subject to some dollar and income limitations. Second, Code section 168(k) allows 50% of the cost of qualifying property to be deducted as additional first year depreciation (AFYD) for property placed in service in 2012 and 2013. Since MACRS depreciation, Section 179, and AFYD can all be applied to the same asset, whichever method you choose, or a combination of all three, deserves attention as a planning tool to minimize taxes both now and in the future.
Section 179 Property
Many taxpayers are eligible to deduct (in lieu of depreciation) the cost of most tangible personal property used in the active conduct of a trade or business. The taxpayer can elect on Form 4562 to expense the cost of eligible “Section 179 property.” Under the old law, this deduction was limited to $139,000.00 for 2012 and $25,000.00 for 2013. The new legislation increased the amount that ca... Read More »
By Larry Gearhardt, Director of OSU Tax Schools and David Marrison, Extension Educator, ANR, Ashtabula and Trumbull Counties
Some landowners have already discovered that lease bonus and royalty dollars received for shale oil and gas lease payments over $150,000.00 per year are subject to the Ohio Commercial Activity Tax (CAT). See OSU Extension Fact Sheet at http://ohioline.osu.edu/sh-fact/pdf/SOGD_TAX2_12.pdf written by David Marrison, Extension Educator. However, some farmers may be surprised to find that they too are subject to the CAT tax because of higher gross receipts.
The Ohio CAT tax was passed in 2005 in response to a lagging economy. In exchange for the CAT tax, businesses are no longer required to pay personal property tax and individuals pay a lower Ohio income tax rate. Ohio’s income tax rate is currently approximately 20% lower than it was in 2004.
The CAT tax is an annual tax that is imposed on most businesses in Ohio and is measured by the amount of taxable gross receipts from most business activities. A business with taxable gross receipts of more than $150,000.00 per calendar year is subject to this tax, which requires the person to register as a taxpayer with the Ohio Department of Taxation. The term “gross receipts” is broadly defined to include most business types of receipts from the sale of property or the performance of services. Certain receipts are not taxable receipts and are excluded from the taxpayer’s tax base, such as dividends... Read More »
By Larry Gearhardt, Director OSU Income Tax Schools
A new option provides eligible taxpayers an easier way to calculate and claim the home office deduction. Currently, they are required to fill out a 43-line form (Form 8829) often with complex calculations of allocated expenses, depreciation and carryovers of unused deductions. Taxpayers claiming this optional deduction will complete a significantly simplified form whereby they can claim a flat rate of $5 per square foot up to a maximum of 300 square feet.
The current restriction that the home office be used regularly and EXCLUSIVELY for business still applies (this means that the kitchen table does not qualify). However, if you have a designated area in your home that you use regularly and exclusively for business, you can take advantage of this safe harbor. Other restrictions are that you cannot depreciate the portion of your home used as a business, but using the new option does not diminish your right to deduct allowable mortgage interest, real estate taxes, and casualty losses on the home as itemized deductions on Schedule A.
Business expenses unrelated to the home, such as advertising, supplies, and wages paid to employees are still fully deductible. The new simplified option is available starting with the 2013 tax year reported on returns filed in early 2014. Further details on the new option can be found in Revenue Procedure 2013-13, posted on the IRS website at irs.gov.
Larry R. Gearhardt started on January 2, 2013 as the new Director of the Ohio State University Tax Schools. Larry was hired as a Field Specialist in Taxation in the College of Food, Agriculture and Environmental Sciences Extension. Before coming to Extension, he most recently was the Sr. Director of Legal and Local Affairs at the Ohio Farm Bureau. Larry received his juris doctorate from the University of Toledo College of Law and a BA in Business Administration from Wittenberg University in Springfield, Ohio. In 2011, Larry received the “Excellence in Agricultural Law” award from the American Agricultural Law Association. Larry lives in Miami County where he operates a 40-acre farm.
Contact information for Larry R. Gearhardt is:
Field Specialist: Taxation
34 Ag Admin Bldg.
2120 Fyffe Rd.
Columbus, Ohio 43210
By David Marrison, OSU Associate Professor
On Friday, January 18, 2013, the United States District Court for the District of Columbia has enjoined the Internal Revenue Service from enforcing the regulatory requirements for registered tax return preparers. In accordance with this order issued by U.S. District Court Judge James E., tax return preparers covered by this program are not currently required to register with the IRS, to complete competency testing or secure continuing education.
Three independent tax preparers (Sabina Loving of Chicago, John Gambino of Hoboken, N.J., and Elmer Kilian of Eagle, Wisc) worked in conjunction with the Institute for Justice, in filing this suit against the IRS.
Beginning January 1, 2011, the IRS mandated that all paid preparers must have received a Preparer Tax Identification Number (PTIN). In addition to the PTIN, the IRS had mandated that PTIN holders who were not under a regulatory practice (such as Certified Public Accountants, attorneys, and enrolled agents) to pass the Registered Tax Return Payer’s competency exam by the end of 2013 and to obtain 15 hours of continuing education each year. Registered Tax Return Preparers would have been required to obtain 2 hours of ethics, 3 hours of federal tax law updates, and 10 hours of other federal tax law each year.
The court opinion is available online at http://www.ij.org/images/pdf_folder/economic_liberty/irs_tax_preparers/irs-opinion-1-18-13.pdf. The IRS can appeal the rulin... Read More »
By David Marrison, OSU Extension Associate Professor & Chris Bruynis, OSU Extension Assistant Professor
The United States Congress worked overtime over the New Year’s Holiday to pass the American Taxpayer Relief Act of 2012 and was signed into law by President Obama. There are many provisions which are allowing members of the agricultural community to breathe a sigh of relief as they head into 2013 and some provisions, such as the farm bill, will cause much debate in the upcoming months. This article provides a summary of some of the provisions passed with this legislation, as well as a few provisions that were not addressed, which will impact agriculture.
Farm Bill Extended and No Cows went over the Cliff, Yet
The Taxpayer Relief Act includes a nine-month partial farm bill extension. With consumers up in arms over milk prices rising to $7 to $8 per gallon because the milk subsidy program would revert back to an antiquated parity-based price support formula that was implemented in 1949 and would have increased milk prices to close to $40 per hundredweight, more than double the current milk price. This extension of the current subsidy program through December 31, 2013 will keep milk prices stable. Basically, Congress kicked the can down the road on the Farm Bill and making any corrections to the milk pricing system.
This extension also extends $5 billion worth of government subsidies for commodities such as corn and soybeans. Other programs includin... Read More »
By: Chris Bruynis, Assistant Professor & Extension Educator
Producers that were forced to sell all or part of their livestock herd as a result of this past summer’s drought, and the resulting shortage of feed, have some options to defer the income from their 2012 tax return to future tax returns. There are two different tax treatments available to defer recognition of the weather-related sales of livestock income that is in excess of the producer’s normal business practice. The first option, called an involuntary conversion, applies to draft, breeding, or dairy animals that will be replaced within a 2-year period. The second option, a 1 year deferral of income, applies to all livestock and allows a 1-year postponement of reporting the sales proceeds as taxable income.
Involuntary conversion rules state that the breeding, dairy, or draft animals need to be replaced within two years. This delay of gain recognition can be postponed up to four years if there is a persistent drought. One of the requirements of this election is that the replacement animals are of the same type as the relinquished animals. When the animals are replaced the taxpayer’s basis in the new livestock is equal to the basis in the livestock sold plus any amount above the proceeds received from the sale of the livestock sold. If there is a persistent weather condition lasting 3 years or longer that makes it infeasible to replace the livestock with similar livestock, the taxpayer can elect ... Read More »
by: David Marrison, OSU Extension Educator
Tax practitioners with an interest in farm income taxes will have an opportunity to attend a one day farm tax workshop scheduled for Monday, December 17, 2012 from 8:30 a.m. to 3:00 p.m. in ten locations across Ohio. This workshop will be taught by Dr. Phil Harris, Professor of Agricultural Economics, University of Wisconsin via tele-conference.
This program has been designed for tax practitioners who have a significant number of farm clients and therefore need a substantial amount of information on agricultural tax issues. Participants will hear an audiotape of a live lecture given by Phil Harris, supplemented with a showing of the slide presentation Dr. Harris used during his lecture. Dr. Harris will be available for questions during two conference calls during the day, and OSU faculty will be in the meeting rooms to answer questions. Registrants will receive a valuable 203 page supplemental book.
The summer drought caused havoc across Ohio for crop producers. This year’s tax school will examine how to handle crop insurance and disaster payments as well as the special provisions to delay income from weather related sales of livestock. Some of the additional topics which will be included in discussion are: Repairs versus capital improvements; Improvements by a tenant; Sale of sand and gravel; Depletion; Information reporting issues; and Income in respect of a decedent.
The Agricultural Tax Issues program has been ac... Read More »
by David L. Marrison, Associate Professor
One change that all taxpayers should be aware of is on January 1, 2013 the tax rates will be increasing for all Americans. What? Didn’t our candidates say they would not be raising taxes? Actually, Congress did not vote to increase your taxes, but rather are allowing the Bush-era tax reductions enacted in 2001 to expire. Thus higher rates will return in 2013.
When you file your federal income tax return before April 15, 2013, you’re filing your taxes using the 2012 income tax brackets so these changes will not be felt then. Instead you will notice them on your first paycheck or monies you earn in 2013. In 2013, the tax brackets will increase to 15, 28, 31, 36 and 39.6 percent from the present levels of 10, 15, 25, 28, 33 and 35 percent. As you can tell this increase will affect the top four marginal brackets and eliminate the 10% bracket, resulting in higher taxes for nearly everybody unless there's a political solution.
Employers will also have to deal with changes in the payroll tax as well in 2013. A cut in the payroll tax that funds the Social Security pension program was extended earlier in 2012. The current 4.2 percent rate paid, down from the previous 6.2 percent rate, expires on December 31. And it seems highly unlikely that Congress will extend this payroll reduction. This cut had boosted the take-home pay of the average worker in 2012 by about $85 per month, or $1,000 per year.
The capital gains rates will al... Read More »
David Marrison, Associate Professor
Ohio and other Midwestern states were hit hard by the 2012 drought. With reported yields as low as 7 bushels to the acre for corn, many farmers will be relying on insurance and disaster payments to make ends meet. Due to the severity of this year’s drought, many farmers will be receiving a sizable insurance check with might put them in a unique tax bind.
Generally, farmers who use the cash accounting method must report income in the year in which they receive it. In 2012, this could create a bunching of income for farmers who would normally sell a portion or all of their crop in the year following harvest. If they receive an insurance or disaster payment for their 2012 crop before the end of the year, this could lead to sizable taxable income because they already have reportable receipts from selling their 2011 crop in 2012.
So what can farmers do? Thankfully, the Internal Revenue Service understands how farmers sell crops and allows for the postponement (for one year) of reporting compensatory payments received for crop loss under IRC section 451(d) and Treasury Regulation section 1.451-6. Generally, this exception applies when crops cannot be planted or are damaged or destroyed by a natural disaster such as a drought or flood. To qualify for the exception, a farmer must use the cash method for accounting and must show that it is his or her normal business practice for crop income to be reported in the year following the year it... Read More »
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Keith L. Smith, Ph.D., Associate Vice President for Agricultural Administration and Director, Ohio State University Extension TDD No. 800-589-8292 ( Ohio only) or 614-292-1868