Machinery Sharing, An Option
In Farm Transition
Ron Haugen
North Dakota State University
Extension Service
2012 National Women in Agriculture Educators Conference
Memphis, Tennessee
March, 2012
7/17/2016
Acknowledgments:
William Edwards, Iowa State University
Don Hofstrand, Iowa State University
Dwight Aakre, North Dakota State University
Willie Huot, Grand Forks Co Extension Agent, NDSU
2
Partial Funding was Provided by a
Grant from the North Central Risk
Management Education Center
GRANT ENTITLED:
• Transitional Strategies and Planning for
Beginning North Dakota Farmers
– Emphasis on Machinery Sharing
3
Background
• Ongoing need for farm transition planning
• 50% of North Dakota farmers have no
transition plan
• 26% of North Dakota farmers are 65 years old
or more
• 52% of North Dakota farmers are 55 years old
or more
• 78% of North Dakota farmers are 45 years old
or more
4
2007 Census of Agriculture
Machinery Sharing and Transfer
of Ownership
March 2012
Ron Haugen
Farm Management Specialist
NDSU Extension Service
Machinery Sharing
•
•
•
•
Informal sharing of machinery
Often without formal agreements
Not considered long-term
Custom rates often used to settle accounts
7
Joint Ownership
(formal agreements)
•
•
•
•
Written agreement
When and how to determine use
How to dissolve agreement
How to determine value at dissolution
8
Why Joint Ownership?
•
•
•
•
Lower cost of ownership
Have use of newer technology
Labor benefits
Less capital needed to get started
9
Sharing Costs
• Costs should be shared equitably
• If each parties’ use is about equal
– Each provides own fuel and labor
– Repairs
– Finance payments
– Cash boot to trade
– Income tax deduction
10
Unequal Use
Al and Chris purchase a combine together
Al harvests 1,000 acres; Chris 500 acres
• Use matches ownership
– Each provides his own fuel and labor
– Al owns two-thirds and Chris owns one-third
– Al pays two-thirds of repair and ownership costs
11
Unequal Use – Example 1
Used in a different proportion than ownership
1. Al and Chris jointly purchase a combine for
$150,000. They each agree to contribute $28
per acre to a separate combine account.
Al - $28/acre x 1,000 acres =
Chris - $28/acre x 500 acres =
$28,000
14,000
$42,000
12
Example 1
2. The following expenses are paid from the
account:
Fuel and lubrication
Repairs and maintenance
Labor (hours/acre @ $12)
Paid to Al: 300 hours
Paid to Chris: 150 hours
Depreciation, interest, insurance and
housing (16% of value of combine)
Paid to Al
Paid to Chris
$ 7,200
4,500
3,600
1,800
12,000
12,000
$ 41,000
13
Example 1
3. The excess funds can be carried over to the
following year, or refunded in proportion to
each partner’s use of the combine
Income
Costs
Excess
$42,000
41,000
$1,000
14
Example 2
Partner with most acres reimburses other owner for extra use.
Al and Chris own combine 50-50
Al harvests 1,000 acres; Chris 500 acres
Both furnish their own fuel and labor, repair costs split 50-50
1. Assume remaining cost, excluding fuel and labor, are equal to 75
percent of custom rates
$24/acre x 75% = $18/acre
2. Al’s ownership share is 50%. Half the total acres is 750. Al uses the
combine on 1,000 acres; 250 more than half the total
3. Al pays Chris $18 for extra acres of use
$18 x 250 acres = $4,500
15
Transferring Machinery Ownership
• Goals of transfer process
– Reduce tax obligation for seller
– Manage sales revenue for retirement
– Lower cost of acquisition for buyer
• Cash flow
• Economic cost
16
Five Basic Transfer Methods
•
•
•
•
•
Outright sale
Installment sale
Gradual sale over a period of years
Lease agreement followed by a sale
Gift
• ? Inheritance
17
Example Inventory of Machinery
Description
Current Market
(sale value)
Original
Tax Basis
Adjusted
Tax Basis
Tractor no. 1
70,000
120,000
51,456
Tractor no. 2
40,000
70,000
0
Planter
24,000
40,000
2,452
130,000
160,000
49,008
264,000
390,000
102,916
Combine
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Outright Sale
• Buyer likely needs significant financing
• Buyer can begin depreciating the machinery
immediately
• Buyer may be able to use 179 expense
method
– Bonus depreciation is only for new machinery
• Seller has income tax consequences that can
be substantial
– Recaptured depreciation
– Capital gains
19
Machinery Outright Sale – Tax Consequences
Seller
Buyer
Sale Price
264,000
Recaptured depreciation 161,084 *
(264,000 – 102,916)
Capital gain
-0-
Beginning basis
Depreciation in first year
* Taxed as ordinary income. May also
need to recapture 179 expense if 179
expense was used and property was
not held for the entire recovery
period. Thus, that portion of 179
expense taken above normal
depreciation would also be subject to
SE tax.
264,000
 non-family sale
179 expense:
38,000
MACRS (7 yr 150%DB):
24,205
[(264,000-38,000) x .1071]
 family sale
179 expense:
MACRS:
(264,000 x .1071)
-028,274
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Installment Sale
•
•
•
•
Seller finances the sale for the buyer
Tax consequences same as outright sale
May ease cash flow requirements of buyer
May have longer repayment terms, lower
interest rate and/or smaller down payment
– May have to use IRS approved interest rate guidelines
• Machinery may depreciate faster than debt
repaid
21
Installment Sale – Tax Consequences
• Assets are immediately placed on buyer’s
depreciation schedule
• Interest paid is a deductible expense
• Seller must report all recaptured depreciation
in the first year
• Sale between parties – capital gains taxed in
first year
22
Machinery Installment Sale
Sale price:
Terms:
$264,000
4 annual payments @ 6% interest, -0- down payment
Year
Principal
Interest
Total
Balance
1
66,000
15,840
81,840
198,000
2
66,000
11,880
77,880
132,000
3
66,000
7,920
73,920
66,000
4
66,000
3,960
69,960
-0-
Seller’s tax obligation in Year 1
$161,084 recaptured depreciation, $15,840 interest income
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Gradual Sale
• Selling individual machines over several years
• Spreads out tax payments as well as cash flow requirements
• Buyer is responsible for all costs for each machine as it is
purchased
• Remaining equipment is leased until sold
• If buyer and seller farm together, division of income should
adjust each year
• May transfer ownership when a machine needs to be
replaced
• Both depreciation recapture and capital gains spread over
several years
24
Lease Followed by Sale
• A lease differs from a rental agreement. Rental agreements
are short-term and no ownership is transferred. Rental
payments are fully deductible
• Lease payments should cover depreciation, return on
investment and insurance
• Economic depreciation: 8 to 10 percent of current market
value
• Return on investment: 6 to 8 percent of current market value
• Lessee pays fuel, lubrication, repairs and maintenance
• Owner is responsible for capital improvements
• Lease payments should decrease as machinery line ages
25
Lease: Tax Consequences
• Lease payments are regular income to owner
• Lease payments are deductible for lessee
• Machinery remains on owner’s depreciation schedule
• To be a true lease agreement:
– A purchase at end of lease must be an option
– Sale price must be fair market value at that time
– Lease payments must reasonably reflect the value of the machinery
• If these conditions are not met, IRS will treat it as an
installment sale
26
Gifting
• Financially advantageous for recipient
• May be a financial burden to the gifter
• Consider other family members
• Tax basis transfers to recipient
• $13,000 of gifts annually may be excluded from federal gift tax
• May combine sale with gifting
• Difference between fair market value and cash paid is
considered a gift
• Must be well documented
27
Program Administration
• Collaborated local sponsors
– They helped with meeting locations and refreshments
• State Coordinator
– Willie Huot, NDSU Extension agent, Grand Forks County
• Used interactive video for presentations to
each site
• Also had local speakers at each site to present
topics in their area of expertise
• Presented at annual Ag Lenders Conferences
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Number of Meetings and Attendees
• 21 workshops at 18 locations
– 389 participants
• 4 agricultural lenders conferences
– 282 attendees
• 1 farm management class (NDSU)
– 35 students
• 2 other meetings
– 64 people
29
North Dakota Farm Transition Meetings 2010-2011
Workshops
Ag Lenders Conf
Farm Mgmt Class
Other Mtgs
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Make-up of Workshop Attendees
• Some were previous participants in Annie's
Projects
• Families with exiting producers and beginning
producers attended
• Majority attended as couples
• All were active producers
31
Evaluation
• 98% increased there knowledge of topic
presented
• 95% increased their confidence in developing
or improving as estate plan
32
Transition Education is Ongoing
• Need for more educational meetings
• Average farmer age is increasing
33
Take Away Points
• Need for further transition education
– Transition will effect every producer at some point
• Interactive video was cost effective
• Local presenters worked well with the video
– Participants wanted an in-person presenter
• Transition planning is a personal issue for most
– Participants may not want to ask questions about
their specific circumstances in a public setting
34
Thank You!
Any Questions?
Contact Information:
Ron Haugen 231-8103
ronald.haugen@ndsu.edu
Dwight Aakre 231-7378
dwight.aakre@ndsu.edu
Acknowledgments:
William Edwards, Iowa State Univ.
Don Hofstrand, Iowa State Univ.
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