Newsletter | Past Issues

March, 2006

In This Issue:

CSP Payments are Not Taxable, or is This too Good to be True?

Certain Tax Returns Go to Different Centers than Last Year

Legal Requirements for Farm Leases

Computerized Farm Record Keeping with Quicken 2006 Now Available as Online PDF Bulletin
Grain Marketing Outlook Monthly Update
Tobacco Buyout and Taxation

Renewable Energy Tax Credits: Corn Stoves, Solar Water Heaters, and Hybrid Cars

Do you have a question that you would like to ask the Ohio AG Manager Team?  If so, click here to email your question.

CSP Payments are Not Taxable, or is This too Good to be True?
Donald J. Breece, Ph.D., Farm Management Specialist, OSU Extension Center at Lima

A recent notice from FSA offices have caused some misunderstandings about the taxation of Conservation Security Program (CSP) payments. As a general rule, government payments are subject to both income and self employment taxes. Deductions, however, are taken for ordinary expenses (seed, fertilizer, fuel). Depreciation may be taken for expenses such as drainage tile, to include Section 179 Expensing. Also, soil and water expenses for such things as earth moving or brush clearing, that can not otherwise be depreciated, are written off on line 14 of Schedule F. These factors will reduce the amount of cost share or other payments subject to tax.

Landowners may also be able to exclude from income some cost share expenses under Internal Revenue Code Section 126. It is under this provision that the CSP payments are also qualified for exclusion, if the requirements of the code section are met. First of all, the CSP payments must be used for capital improvement to use the I.R.C. 126 exclusion. Therefore, CSP payments for stewardship and maintenance of conservation practices are not eligible for the I.R.C. 126 exclusion. Furthermore, the improvement for which the payment is made cannot significantly increase the annual income derived from the property. This will involve a present value analysis.

For the most part, I.R.C. 126 would not be used by most farmers, unless the capital improvement is so very expensive, that the soil and water deduction (I.R.C. 175) will not be sufficient. This deduction is limited to 25% of gross farm income. Furthermore, a cash rent landlord is not eligible for the I.R.C. 175, soil and water expense deduction. However, the cash rent landlord could use the section 126 exclusion for conservation improvements.

Income tax practitioners that have attended the Ohio Income Tax School (sponsored by OSU Extension) will be knowledgeable of the facts of this situation and will have practical examples to follow. Other information may be found at: http://www.nrcs.usda.gov/programs/csp/ and

http://a257.g.akamaitech.net/7/257/2422/01jan20051800/edocket.access.gpo.gov/2005/pdf/05-12516.pdf.

Consult your tax advisor for further information.

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Certain Tax Returns Go to Different Centers than Last Year

Donald J. Breece, Ph.D., Farm Management Specialist, OSU Extension Center at Lima

As taxpayers begin to prepare their tax returns, the Internal Revenue Service notes that some may be sending their returns to a different service center than last year. Those who received a tax instruction booklet from the IRS in the mail and use the labels included with the booklet can be assured that their tax returns will go to the correct address. Taxpayers who e-file are not affected by these changes.

For tax year 2005, the mailing changes affect returns, with or without payments, from the District of Columbia and 11 states – Colorado, Delaware, Kansas, Maryland, Mississippi, Nebraska, New Mexico, Ohio, South Dakota, Virginia, and West Virginia.

Taxpayers should send:
• Returns from Delaware and Virginia to the IRS Center in Atlanta, Georgia;
• Returns from the District of Columbia and Maryland to the IRS Center in Andover, Massachusetts;
• Returns from Ohio to the IRS Center in Kansas City, Missouri;
• Returns from Kansas, Mississippi and West Virginia to the IRS Center in Austin, Texas;
• Returns from Colorado, Nebraska, New Mexico, and South Dakota to the IRS Center in Fresno, California.

For taxpayers who file paper returns, the correct center addresses are on labels inside the tax packages. Taxpayers who do not receive a package should refer to the back cover of the instructions to Form 1040, 1040-A or 1040EZ.

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Legal Requirements for Farm Leases

Robert Moore, Attorney, Wright Law Co. LPA, Dublin, Ohio, www.wright-law.net

Farmland leasing has become more commonplace as Ohio’s farmland passes to more and more absentee landowners. Around one-half of all farmland is leased in Ohio, and of this, approximately 75% is on a cash rent basis. Therefore, cash leases are an important part of many crop producer’s operations.

As common as farmland leasing is, the legal requirements for farmland leases are often not fully understood. Changes in the law and local customs and habits often cause producers to misinterpret the legal requirements of farm leases. It is the intent of this article to discuss the minimum requirements of farmland leases in Ohio. There are many exceptions and special rules affecting leases which are beyond the scope of this discussion, therefore, legal counsel should be sought for questions or issues relating to a specific lease or circumstances.

The full article is available here: http://ohioagmanager.osu.edu/resources/Newsletter Article.pdf

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Computerized Farm Record Keeping with Quicken 2006 Self Study Manual Now Available as Online PDF Bulletin

Barry Ward - Leader, Production Business Management, OSU Extension Department of Agricultural, Environmental and Development Economics

The newly updated Computerized Farm Record Keeping with Quicken 2006 Self-Study Manual is now available as on online OSU Extension Bulletin in pdf format at:
http://ohioline.osu.edu/b920/

This Quicken self-study manual has been developed due to the demand of Ohio producers seeking assistance on using an inexpensive, easy to use program for farm record keeping. The objective of the authors is for Quicken users to begin keeping farm records on their home computer by following the step by step procedures outlined in each chapter of this manual. The manual will also be useful to experienced Quicken users as they upgrade to a newer version and continue to improve their record keeping skills.

A commonly asked question is, “Which version of Quicken should I purchase for my farm records?” Quicken offers five different versions for 2006, Quicken Basic 2006, Quicken Deluxe 2006, Quicken Premier 2006, Quicken Home & Business 2006 and Quicken Mac 2006. While each product has different features, our experience is that the basic program, Quicken Basic 2006, will perform most farm record keeping tasks adequately.

This manual is written for Quicken 2006 Basic. Future manuals and updates will be available on the OSU Extension Ohioline web site http://ohioline.osu.edu. In most cases the basics needed to begin your farm record keeping will not change with a newer version.

We also receive questions about the use of the Quicken Home & Business version versus the use of Quicken Basic for farm record keeping. If your farm business requires you to create customer invoices and statements and to have accounts for payables and receivables, you need to be using the Home & Business version of Quicken. The Home & Business version can also generate accrual-based profit and loss statements if the program is set up and used properly throughout the year. However, for the majority of cash-basis farm record keepers, Quicken Basic will provide more than enough information for management decisions and income tax planning.

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Grain Marketing Outlook Monthly Update
Dr. Matt Roberts, AED Economics, The Ohio State Univeristy

Corn prices have remained well-supported throughout February. While repeated tests of resistance at $2.27 have yet to be successful in the March contract, the lows between tests have been progressively higher. Wheat hasn’t even bothered testing lows during its rally. Dry weather in the Texas and Oklahoma panhandles has spread farther into the hard red winter wheat growing area, increasing concern for the winter crop. Only soybeans have bucked the trend. They have spent the past six weeks bouncing between $5.60 and $6. But for corn and soybeans, there is no question that fundamentals point lower; much lower. The current stocks levels for corn and beans would imply nearby futures prices of $2.10 and $5 at most. The drought concern is more real in wheat, but it doesn’t yet justify $4.35 in new crop, or $4.45 in July 07 futures. So what is going on? Find out by reading the full article here:

http://aede.osu.edu/people/roberts.628/extension/newsletter/g06.pdf

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Tobacco Buyout and Taxation
Donald J Breece Ph.D., Farm Management Specialist, OSU Extension Center at Lima

I have had several questions about taxation of Tobacco Buyout payments. Here are a couple of web sites with very useful information concerning Form 1099s received by former quota owners and producers. Believe it or not, there are people receiving these payments from every state, and living in many Ohio counties.

Also, an excellent site with recent information is:

http://www.uky.edu/Ag/TobaccoEcon/publications/Method2Report_Tobacco_Payments-Form_1099.pdf .

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Renewable Energy Tax Credits: Corn Stoves, Solar Water Heating, and Hybrid Cars

Andy Kleinschmidt, OSU Extension Educator-Van Wert County

You may be able to take two new tax credits , the nonbusiness energy property credit and the residential energy efficient property credit, for making energy saving improvements to your home in 2006. In addition, there are also credits available for alternative motor vehicles including hybrids.

Consumers who purchase and install specific products, such as energy-efficient windows, insulation, doors, roofs, and heating and cooling equipment in the home can receive a tax credit. The law provides a 10 percent credit for buying qualified energy efficiency improvements. The maximum credit for all taxable years is $500 – no more than $200 of the credit can be attributable to expenses for windows.

Consumers may also take a credit equal to 30% of qualifying expenditures for purchase for qualified photovoltaic property and for solar water heating property used exclusively for purposes other than heating swimming pools and hot tubs. The credit is capped at $2000. Home improvement tax credits apply if the improvements are made between January 1, 2006 and December 31, 2007.

Individuals and businesses who buy or lease a new hybrid gas-electric car or truck are eligible for, and can receive, an income tax credit up to $3,400 – depending on the fuel economy and the weight of the vehicle. The other vehicles eligible for credits are fuel cell vehicles, alternative fuel vehicles, and hybrid heavy trucks. The IRS will issue guidance providing certification procedures for these vehicles in the near future.

Details on the above tax credits are outlined in IRS Factsheet, Highlights of the Energy Policy Act of 2005 for Individual, available at:

http://www.irs.gov/newsroom/article/0,,id=153397,00.html

Questions have arisen regarding corn burning stoves, pellet-type stoves, and wood burning stoves, and whether or not these items qualify for a tax credit if purchased in 2006. There is currently an unfunded provision of the Energy Policy Act that, if funded by Congress, could provide a rebate of 25%, capped at $3000, for consumers choosing renewable energy, which may include pellet stoves for home heating. Additional action is required by Congress to fund this provision. As of this writing (2/23/06), this provision is not funded. This provision is found in Title II(A), Sections 206-208 of the Energy Policy Act. The Energy Policy Act of 2005 is available at:

http://energycommerce.house.gov/108/energy_pdfs_2.htm.

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Ohio Ag Manager Team Leaders: Chris Bruynis & David Marrison

Web Page Managers: David Marrison & Andy Kleinschmidt

Information presented above and where trade names are used, they are supplied with the understanding that no discrimination is intended and no endorsement by Ohio State University Extension is implied.

All educational programs conducted by Ohio State University Extension are available to clientele on a nondiscriminatory basis without regard to race, color, creed, religion, sexual orientation, national origin, gender, age, disability or Vietnam-era veteran status.

Issued in furtherance of Cooperative Extension work, Acts of May 8 and June 30, 1914, in cooperation with the U.S. Department of Agriculture, Keith L. Smith, Director, Ohio State University Extension.

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