Author: Brian Watland

KT Insights
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Guidelines for Deferral of Livestock and Crop Insurance Proceeds

The weather impacts all of us, but it impacts the farmer and rancher financially. Many farmers and ranchers have recently been impacted by major drought throughout most of the US. The IRS provides tax relief by allowing for the deferral of income under certain circumstances. There are two options available when electing to defer income from livestock that have been sold because of a drought or other weather-related conditions.

Option 1

A taxpayer may be eligible to defer excess 2023 sales of market and/or breeding livestock and report that amount as income in 2024. The following criteria must be met:

  • The principal business of the taxpayer is farming.
  • The taxpayer is a cash basis taxpayer.
  • Drought, flood, or other weather conditions resulted in the taxpayers’ area being designated as eligible for assistance by the federal government.
  • The sale of the excess livestock would not have occurred if it were not for the weather conditions.

In general, it’s common to use the average head sold in the prior three years to determine the number of livestock sold under normal business practices. This calculated average is generally used as a base to determine the excess head sold. Ketel Thorstenson (KT) can assist with this calculation to determine the amount of eligible deferral.

Option 2

This option allows the postponement of gain on livestock sold in 2023 by purchasing replacement animals within a two-year period. It only applies to draft, breeding, or dairy animals. The replacement period is extended to four years if the taxpayers’ area has been designated as eligible for assistance by the federal government in the future year.

There are a few rules that a taxpayer must follow when replacing their livestock:

  • The replacement livestock must be the same type and the same sex as the deferred livestock.
  • The number of head replaced does not have to be the same as the number of head deferred.
  • The taxpayer must spend replacement costs equal to the amount of the gain deferred.

In some cases, it may not be feasible for a taxpayer to reinvest the deferred gain back into livestock. If this is the case, the taxpayer is allowed to replace the deferred livestock with other tangible property, which can include vehicles and equipment. Land is not eligible.

If the livestock is not replaced, an amended return will need to be prepared for the deferral year to report the income.

Deferral of Crop Insurance

A taxpayer is also able to defer crop insurance proceeds for one year. In order to qualify, it must:

  • Be customary practice for the taxpayer to sell more than 50% of the crop in the year following the harvest.
  • They must also report income on a cash basis.
  • They must receive crop insurance proceeds in the same year as the damage occurred.
  • The insurance must be for damages and not lost revenue.

If this election is made, insurance income from all crops must be deferred, there is no option to choose how much to defer.

These deferral options can provide much needed tax relief to farmers and ranchers who are already facing tough times. However, the process can be complicated as there are many regulations, elections, and tests that apply. In addition, deferral may not always be advantageous based on type of livestock sold, future years income being greater than current year, future tax law changes, economic conditions, etc.

Please don’t hesitate to contact your ag tax professional at KT if you believe you may be eligible for any of these deferral options. We are here to help you through this process.

To see a list of counties designated as effected by drought: https://www.irs.gov/pub/irs-drop/n-23-67.pdf

January 22, 2024
| Brian Watland
KT Insights
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IRS Announces Counties Eligible to Defer Livestock Sales

Each September the IRS publishes a list of counties for which exceptional, extreme, or severe drought was reported during the preceding 12 months. If you reside in, or are adjacent to one of these counties, and you sold more livestock than you generally do because of the drought, you may be eligible to defer livestock sales into a future year.

Designated Counties

South Dakota:

Aurora, Beadle, Bennett, Bon Homme, Brookings, Brown, Brule, Buffalo, Campbell, Charles Mix, Clark, Clay, Codington, Corson, Custer, Davison, Day, Deuel, Dewey, Douglas, Edmunds, Fall River, Faulk, Grant, Gregory, Haakon, Hand, Hanson, Hutchinson, Jackson, Jerauld, Kingsbury, Lake, Lawrence, Lincoln, Lyman, McCook, McPherson, Marshall, Meade, Mellette, Miner, Minnehaha, Moody, Oglala Lakota, Pennington, Roberts, Sanborn, Spink, Stanley, Todd, Tripp, Turner, Union, Walworth, Yankton, and Ziebach.

Wyoming:

Albany, Campbell, Carbon, Converse, Fremont, Goshen, Laramie, Lincoln, Niobrara, Park, Platte, Sublette, Sweetwater, Teton, Uinta, and Weston.

Essentially the entire state of South Dakota and Wyoming will qualify for the drought deferral because all counties are adjacent to a designated drought county.

Additional details – https://www.irs.gov/pub/irs-drop/n-23-67.pdf

More information on this topic will be included in the upcoming edition of the “KT Addition” newsletter. Please contact your KT Ag Tax Professional to see if this opportunity will apply to your tax situation.

January 4, 2024
| Brian Watland
KT Insights
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AG Producers – Planning Ahead Can Save You Thousands!

During the Fall season, I encourage Ag producers to pause and take some time to get caught up with their yearly bookkeeping. They should also spend some time reflecting on the current year and think about their plans and opportunities for the upcoming year. Accurate, up-to-date bookwork is essential to this planning process. Ag Producers are in a unique position to really take advantage of planning and timing of income and expenses to help them with potential tax savings.

Most Ag Producers are on a cash basis, which means that income is recognized when the cash is received from a sale, and expenses are recognized when paid. The timing of these events is something that you can plan for and control. An example includes waiting to sell grain or livestock until after the first of the year so that you do not receive these cash receipts during the current tax year. This allows you to report this income in the following tax year instead of the current tax year. The result is you will not need to pay taxes on this income in the current year.

You can also pay in advance for expenses you generally would have in the future year. This may include items such as seed, chemical, fuel, or major equipment repairs. By purchasing and paying the bill during the current year, expenses will increase in the current year, reducing the taxable income and lowering your tax bill. It is important to keep in mind that there are limitations to how many expenses can be prepaid. For example, prepaid expenses cannot exceed 50 percent of other farm expenses in the year of deduction. It is also important to have a good working relationship with your lender, as these timing decisions may impact cash flow.

Overall, deferring revenue until the subsequent year and prepaying expenses in the current tax year is a strategic way to reduce your tax burden.

One opportunity to consider is the timing of equipment purchases. By purchasing, and placing into service, a new piece of equipment this year, you have the opportunity to lower your overall taxable income by using depreciation expense, bonus depreciation expense, or the Section 179 deduction. I always encourage Ag Producers to carefully consider these purchases to first make sure the purchase makes sense for their operation. It is not necessarily a good idea to purchase a new asset that is not necessarily needed simply to get a tax deduction. Thinking through some long-range plans (2-5 years) will assist in making major purchases that will truly benefit your operation. Depreciation rules are complicated, and they are changing. Consult with your KT advisor before you make a major purchase to help ensure it will provide the maximum tax benefit.

Another opportunity to save some income tax is to fund your IRA, Roth IRA, or other retirement account. Funding a Health Savings Account to pay for qualifying medical costs will also lower your yearly taxable income.

Take some time to get your ranch bookkeeping caught up in October or November and make an appointment with your KT advisor to do some year-end tax planning and projections. We will be glad to assist you in paying as little in taxes as possible.

Wise planning can save you thousands!

October 9, 2023
| Brian Watland
KT Insights
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Ag Producers – The Value of Making Your Required Annual Tax Payment by January 15th

One of the special tax provisions that applies to qualified farmers is relief from the estimated tax requirements. Agriculture Producers may be familiar with the IRS rule stating that qualifying farmers who make two-thirds of their gross income from farming can wait to make their annual income tax payment until they file their tax return if the tax return and payment are made before March 1.

The “March 1 Farm Deadline” puts tremendous pressure both on the qualifying producer as well as their tax professionals. There are many challenges to meeting this deadline, and those have only increased over the past few years. These challenges include late arriving source tax information, including brokerage statements from investment accounts or K1’s from businesses investments, late changing tax laws, tax forms not being released in time, and the ever-increasing complexity of tax returns. This along with spring calving and other seasonal work on the ranch can make meeting this deadline extremely challenging.

One option available to avoid this deadline is to make use of the January 15th estimate. A qualifying farmer can file an estimated tax payment by January 15th that is the lessor of either two-thirds of the current year or 100% of last year’s tax. By making this tax payment before January 15th, you gain additional time to gather the needed information to prepare your tax return.

The amount of this estimated annual tax payment can be calculated using the worksheet that goes with the form 1040-ES. The following rules apply:

  • On line 12a, multiply line 11c by 66 2/3% (0.6667).
  • On line 12b, enter 100% of the tax shown on your prior year tax return regardless of the amount of your adjusted gross income.
  • On line 12c, find the smaller of the two amounts and this is the amount of the required payment needed to avoid any penalty or interest.

Please contact your Ketel Thorstenson Ag Tax Professional if you are unsure if you qualify or need help calculating the estimated tax payment. More information can also be found in IRS Publication 225 – Farmer’s Tax Guide, and IRS Publication 505 – Tax Withholding and Estimated Tax.

IRS Publication 225: https://www.irs.gov/pub/irs-pdf/p225.pdf

IRS Publication 505: https://www.irs.gov/pub/irs-pdf/p505.pdf

June 20, 2023
| Brian Watland
KT Insights
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USDA Assistance for Ag Producers

The COVID-19 Pandemic affected everyone around the globe and hit our ranching and farming communities hard. These programs were put in place to help clients like ours who experienced revenue losses from 2020-2021. The goal is to better support our farmers and offer a comprehensive approach to disaster assistance and provide economic support to those bearing the financial brunt of circumstances beyond their control. Although part of the USDA, these programs are administered by your county’s Farm Service Agency (FSA).

ERP Phase 2 – This is a tax year-based certification program that provides assistance for producers that suffered a loss in revenue due to necessary expenses associated with losses of eligible crops (excluding crops intended for grazing), due in whole or in part, to a qualifying disaster event that occurred in the 2020 or 2021 calendar year. Qualifying natural disaster events include wildfires, hurricanes, floods, derechos, excessive heat, winter storms, smoke exposure, excessive moisture, qualifying drought, and other related conditions.

In general, payments for ERP Phase 2 are based on the difference in allowable gross revenue between the selected representative benchmark year(s) and the disaster year(s). ERP Phase 2 uses 2018 and 2019 for the benchmark years and 2020 and 2021 for the disaster years.

To prepare the application, you will need your Schedule F tax return information for these respective years along with the details of what is included in the revenue. As always, some types of revenue are excluded and there may be ag producers that are ineligible for the program.

PARP – The USDA is providing critical support to producers impacted by the effects of the COVID-19 outbreak through PARP. PARP provides direct financial assistance to producers of agricultural commodities who suffered at least a 15% loss in gross revenue in calendar year 2020 due to the COIVID-19 pandemic.

This program also looks at the overall allowable gross revenue between the COVID-19 year (2020 calendar year) and the benchmark years (2018 and 2019 calendar year). If there was a 15% decline in revenue, you may be eligible for PARP.

The deadline for both programs is June 2, 2023.

Ketel Thorstenson has a team of experienced agricultural accounting professionals that can help with this application process or assist you with tax returns and information to fill out the application. Please contact your FSA representative or refer to the USDA website for complete information and details on these programs.

PARP Revenue Loss Assistance Information Sheet:
https://www.farmers.gov/sites/default/files/documents/farmersgov-parp-factsheet.pdf

Revenue Loss Assistance – Comparison Fact Sheet:
https://www.fsa.usda.gov/Assets/USDA-FSA-Public/usdafiles/emergency-relief-program/pdfs/fsa_parp_erp2_factsheet_23.pdf

PARP and ERP Phase Two Myth-Buster Fact Sheet:
https://www.farmers.gov/sites/default/files/2023-04/farmersgov-erp2-parp-myth-buster-factsheet.pdf

June 14, 2023
| Brian Watland
KT Insights
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Education Credits – Getting the Biggest Bang for Your Buck

Currently there are two educational tax credits allowed by the IRS, the American Opportunity Tax Credit (AOTC), and the Lifetime Learning Credit (LLC).  The goal of this article is to define these two credits and discuss some of the common questions regarding their use.

The AOTC is a credit for qualified educational expenses paid for an eligible student for the first four years of post-secondary education.  The credit is calculated as 100 percent of the first $2,000 of qualified expenses plus 25 percent of the next $2,000 of qualified expenses.  The AOTC is worth up to $2,500 per student and 40 percent of the credit is refundable if certain qualifications are met.  A refundable tax credit will create a refund for the taxpayer, even when no tax is due.

To be eligible for the AOTC, the student must be pursuing a degree or other recognized educational credential, be enrolled at least half time for at least one academic period beginning in the tax period, not have finished the first four years of higher education at the beginning of the tax year, and not have previously claimed the AOTC or the former Hope credit for more than four tax years.

Unlike the AOTC, the LLC does not have a refundable portion and the credit is limited to the amount of tax you must pay on your taxable income. The credit is calculated as 20 percent of qualifying educational expenses and is limited to $2,000 per tax return.  Unlike the AOTC, which is only allowed for the first four years of undergraduate schooling, the LLC is available for any qualifying education expenses.

For both credits, if you are claimed as a dependent of another person, you cannot claim the credit on your own tax return.  The person claiming you as a dependent is eligible to claim the tax credit.  Each credit does have some income phase out criteria based upon your adjusted gross income and filing status, so for some higher income individuals there may be some limitations.  If the tax return is filed as Married Filing Separately, the credit is not allowed.

Qualifying educational expenses for both credits generally include tuition, required fees, books and supplies.  Room and board and transportation expense are not included.

Some of the questions we hear from clients include the following:

  1. My child started college this year and also earned $5,000 from his part time job.  Is it best to claim the credit on their tax return, or the parents tax return?    Generally, the parents have greater income, and it is more advantageous for them to claim the child as a dependent and the parents take the credits.  Assuming the parent’s income is low enough, they will receive a $2,500 credit, whereas the child would have received only $1,000. 
  • I paid $10,000 for the tuition, books, and fees for my grandchild to attend college this year.  Can I deduct these or get an educational credit for them?  You must be claiming the person on your tax return to be eligible for the credit.  If the parents are claiming the child, they can claim the credit, even though the grandparents paid the qualifying college expense. 
  • I enrolled in a taxidermy school and paid tuition and purchased supplies to learn taxidermy.  Can I deduct this?  Educational expenses generally must be paid to a post-secondary school that has accreditation and is approved to issue financial aid through the US Department of Education.  The schools’ business office will issue a Form 1098-T which will document the eligible college expenses.  Most main line colleges and technical schools are a part of this program.  If in doubt, check with the school prior to enrolling
  • My child is a Junior in high school and has enrolled in dual enrollment classes at a local college.  We must pay a portion of the cost.  Is this eligible for a college credit? 
    Yes, the qualifying education expenses that must be paid by the student do qualify for the educational credits.  Unless the student is carrying at least a half time class load, the Lifetime Learning Credit would be the only credit they would qualify for.
  • I am a teacher and every year I take a college class or two to maintain my teaching certification.  Do the educational credits apply to this?  Yes, as long as your employer does not reimburse you for the cost.  This is the perfect place for the lifetime learning credit to be used to defray 20% of the required costs.  Make sure you receive the form 1098-T from the college.

By starting to save early for college, and with the use of these credits, higher education may be more attainable than you thought.  Please contact your Ketel Thorstenson tax advisor to discuss specific details regarding educational tax credits and planning for college.

Visit https://www.irs.gov/instructions/i8863 to view the IRS instructions for Form 8863. It provides a side-by-side comparison of the American Opportunity Tax Credit and the Lifetime Learning Credit.

September 24, 2021
| Brian Watland
KT Insights
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Is a Franchise Business the Right Choice for Me?

Have you daydreamed of being your own boss, running your own business and taking control of your own destiny?  Have you read magazine articles about franchise opportunities and perhaps taken the first step and requested information to start a franchise?  You may be a good candidate to be a franchise owner, but I encourage you to do your homework carefully before you make this big decision.

Advantages to choosing a franchise.
As a child growing up in the 1970’s in a town with a population of about 10,000 in West Central Minnesota, I recall going to a restaurant called “The Quick Stop.”  They sold what we would call “fast food,” that was ordered at the counter.  It was always a treat to go eat there and they were always busy.  A new restaurant called McDonalds opened up about two blocks down the road, and it did not take long for The Quick Stop to close.  They both sold essentially the same product, fast food, in the same manner, but McDonalds captured the market share and the independent restaurant soon closed.

A key advantage of a franchise is the brand and identity they have established.  Often they also have large nationwide marketing and advertising campaigns to continue to expand this brand identity and awareness.   This, along with an established product or service, help draw awareness and new customers into their door.  I have had the opportunity to travel internationally and I make it a point to have a Big Mac and Coke in every country I go to and I can assure you they all taste the same!  This similar experience (branding) is a high priority of franchises and builds confidence in the eyes of the consumer.  The word Coke or Coca-Cola is recognized around the globe in every language.  This is possible through strong branding and brand development along with marketing and advertising.

Another benefit that a franchise business brings is its operational standards, procedures and training program.  New franchisees often go through a training program to learn how to operate and manage their business.  This education and training can be very valuable in the ultimate success of the business.  Larger franchises often have regional developers or “coaches” which work with franchisees in developing and expanding their business, handling operational questions, opening new locations, etc.  Ongoing support can be valuable in creating a long lasting business which will have value once you decide to sell it and move onto another opportunity.

Am I the right person to own a franchise?
One of the first things to do is reflect honestly and carefully and decide if you will be a good fit to own a franchise business.  All successful business owners share a strong passion for their business.  Along with this passion is a strong work ethic and willingness to put in the necessary time to create a successful business.  People skills and a desire to work with others, both coworkers and customers is also needed.  Most businesses, including franchise businesses, are not get rich quick opportunities, and they take a lot of time, effort and energy to be successful.  Ultimately as a business grows, your role will include more leading, guiding and directing, but initially you will probably be working in the business alongside your team.

A successful franchisee also needs to be willing and able to follow a plan and a business model.  One of the biggest items you acquire when purchasing a franchise business is the business model and operating procedures that is already developed and proven.  If you have your own ideas on how to run things, you may become frustrated and question why you need to do things “their way.”

For example, if you are an aspiring restaurant owner a franchise restaurant may be a great opportunity as they have an established brand, marketing presence, well developed training program, and ongoing support to assist you in becoming a successful business owner.  If your personality is one that you prefer to experiment with recipes, create your own daily specials, etc., you may be very frustrated in a franchise restaurant where you are not allowed to follow your creativity.  There are many successful sandwich shops or coffee shops, along with the major franchise businesses we all are familiar with.  If you prefer to do your own thing and follow your own ideas, you may be happier as an independent business owner without the assistance of a franchise.

Do your homework!
There is a substantial financial investment in a franchise.  It is important to do your homework, read, ask questions, and do your research.  Read all of the franchise literature carefully, especially the franchise agreement.  The franchise agreement is loaded with details and fine print that you will be obligated to follow for the duration of the agreement.  Items to look at are minimum royalty and advertising fees, required expenditures, required hours of operations, etc.  I have heard of these referred to as similar to a “marriage agreement.”  They are easy to get into, but can be difficult to get out of if you decide it is not the right fit for you.   Perform an honest analysis research your market area and competition.  Some franchises may work wonderfully in a large urban or suburban area, but in a more rural area they may struggle.  Contact existing franchise owners and ask them of their experience.  Ask them to honestly share with you if they feel they are getting value for the investment they have made.

Before you make a decision, it is always wise to get guidance from your team of experts.  Speak with your accountant, create a business plan with realistic financial projections, discuss your business structure, and have a professional review of the franchise agreement for any concerns they may observe.

Performing due diligence ahead of time can help you enter into a wonderful relationship with the franchisor, and avoid a “bad marriage” situation.

January 13, 2020
| Brian Watland