Agricultural Issues
Chapter 9
pp. 301-347
2015 National Income
Tax Workbook™
Issues
1.
2.
3.
4.
5.
6.
7.
8.
pp. 302-347
Livestock Transactions
Form 1099-MISC
Net Investment Income Tax
Inherited Property
Oil and Gas Payments and Deductions
Repairs
Revoking a CCC Loan Election
Marketing Gain on CCC Loans
Issue 1: Livestock Transactions
pp. 302-315
 Livestock acquisition
 Livestock sales
 Casualty gain or loss
Livestock acquisition
p. 302
 Reason for acquiring determines treatment
 Example 9.1: Purchased for resale
Sale price
$13,000
Purchase price
- 8,000
Gain
$ 5,000
Depreciation
pp. 302-303
 Depreciation begins when first placed in service for
intended use
 Immature livestock
 IRS says
 When draft animals can be worked
 When dairy animals can be milked
 When breeding animals can bred
 Taxpayers could argue when dairy animals can be
bred
Example 9.2: Placed in Service
pp. 303-304
 Purchased 15 heifers in 2014 for $22,500
 Bred the heifers in May 2015
Cost
$22,500
50% AFYD*
- 11,250
Depreciable basis
$ 11,250
MACRS rate
× 15%
Cost recovery
$ 1,688
Livestock sales
pp. 304-307
Purpose for holding livestock determines where
a sale is reported.
 Held for sale: Schedule F (Form 1040)
 Dairy, breeding, sport, or draft: Form 4797
 < 12 (24) months: Form 4797, Part II
 > 12 (24) months:
• Depreciated: Form 4797, Part III
• Not depreciated: Form 4797, Part I
Example 9.3: Dairy livestock
pp. 304-307
Calves held for sale
Raised cows
Purchased cows
Culled heifers
Schedule F, line 2:
Form 4797, line 2:
Form 4797, line 10:
$12,150
$48,600
$ 6,800
$8,500
12,150
48,600
8,500
Form 4797
Line 20
Line 21
Line 22
Line 23
Line 24
Line 25a
Line 25b, 30, 31, 13
p. 307
6,800
15,000
15,000
0
6,800
15,000
6,800
Casualty gain or loss
pp. 307-315
Dairy, breeding, sport, or draft livestock is
treated the same as other trade or business
property:
 Loss is decrease in FMV (limited to basis)
 Gain is insurance or government payments
in excess of basis
Example 9.4: Dairy Livestock
pp. 307-310
Cost
2 raised cows
0
Purchased cow 2,100
Purchased cow 2,100
FMV
2,200
1,100
1,100
Insur. Basis
2,000
0
1,000
0
1,000 1,062
Form 4684
Line 20
Line 21
Line 22
Line 23
Line 24
Line 25
Line 26
Lines 27 & 28
p. 308
A
B
2,000
2,000
1,000
1,000
C
1,062
1,000
1,100
0
1,100
1,062
62
I.R.C. § 1231 Netting
p. 310
 Net casualty gains are netted with other
I.R.C. § 1231 gains (unless they are
deferred)
 Net casualty losses are ordinary deduction
Example 9.5: Casualty gain
deferred
pp. 310-311
Insurance proceeds received
Adjusted tax basis
Gain realized
Gain deferred
Gain recognized
Cost of replacement property
Gain deferred
Basis of replacement property
$3,000
0
$3,000
- 3,000
$
0
$4,500
- 3,000
$1,500
Property held for sale
p. 312
Generally, no special tax treatment of
involuntary conversion
 Reimbursements reported on Schedule F
 Usually no gain or loss items have zero
basis
Weather-related provisions
pp. 312-314
Two provisions
 Involuntary conversion (applies only to
draft, breeding, or dairy animals)
 1-year postponement of gain (applies to all
livestock)
Involuntary Conversion
pp. 312-313
 Sale must be due to weather conditions
(disaster declaration is not required)
 Replaced within 2 years
 New livestock used for same purpose
(breeding, dairy, or draft)
 Applies only to sales in excess of normal
 Must attach a statement to tax return
1-year deferral
p. 313
 Must be disaster declaration
 Applies only to sales in excess of normal
 Must attach statement to tax return
Livestock deaths due to
disease
pp. 314-315
 Not a casualty because not sudden
 It is an involuntary conversion
 Section 1231 property gain or loss is
netted with other section 1231 gains
and losses
 Reported on Schedule F or Form 4797
Issue 2: Form 1099-Misc
pp. 315-317
 Taxpayers must issue Form 1099-MISC to
vendors whom they pay $600 or more for
 Rent
 Services
 Exception for corporations other than
 Attorneys fees
 Veterinarians
Reconciling Forms 1099-MISC to
tax return
pp. 316-317
 Taxpayers should report amounts reported
on Forms 1099 they receive where IRS
expects to see it or get corrected Form 1099
 Example 9.6:
Form 1099-PATR
$952
IRS expects to see it on Sch. F
Interest was deducted on Sch. E
Example 9.7: Triple net lease
pp. 316-317
Mortgage interest
Mortgage principal
Property taxes
Insurance
Total deemed payments
$ 6,500
13,500
7,500
2,500
$30,000
Issue 3: Net Investment Income
pp. 317-319
 Active farmers are not subject to NIIT on
 Operating income
 Gain on sale of assets used in farming
 NIIT is 3.8% of lesser of
 Net investment income
 Excess MAGI
MAGI Thresholds for NIIT
p. 317
Investment income
p. 317
 Gross income from interest; dividends; net
capital gains; rental and royalty income;
nonqualified annuities; and
 Income from businesses that are
 involved in trading of financial instruments
or commodities
 passive activities for the taxpayer
Not investment income p. 317








wages; unemployment compensation;
operating income from a nonpassive business;
social security benefits;
alimony;
tax exempt interest;
self-employment (SE) income;
Alaska Permanent Fund dividends; and
Distributions from retirement plans
Farms in transition
pp. 318-319
Income from payments received during farm
transition may be net investment income
 Example 9.8: renting to LLC
 Under self-rental rule, rent and gain on
sale are not net investment income
 Example 9.9: not materially participating
 Example 9.10: sale of assets
Issue 4: Inherited Property
pp. 319-320
 Basis of inherited property is adjusted to
the value on the date of death or alternate
valuation date
 Automatic long-term capital gain holding
period
 Exception: income in respect of a
decedent (IRD)
Example 9.11: Growing crops
pp. 319-320
Issue 5: Oil and Gas Payments
and Deductions
pp. 321-328





Transfers of Mineral Rights (sale or lease)
Damage Payments
Advance Royalty Payments
Oil and Gas Depletion
Pipeline Right-of-Way Easements
Transfers of Mineral Rights
pp. 321-322
 Sale of mineral rights
 Section 1231 gain or loss
 Landowner must prove cost basis or
inherited basis
 Lease of mineral rights
 Landowner reports payments on
Schedule E (Form 1040)
Damage Payments
pp. 322-323
 Payments for crops go to owner of the crops
 Reported on Sch. F or Form 4835
 Payments for damage to land or timber reduce
basis
 Excess over basis is reported on Form 4797
or Form 8949
Advance Royalty Payments
p. 323
Ordinary income
 To extent of actual production, claim
greater of percentage or cost depletion
 For remaining payment, claim cost
depletion
Oil and Gas Depletion
pp. 323-327
Owners of an economic interest in oil or gas
can claim a depletion deduction to recover
their capital investment in amount sold or
consumed. The deduction is greater of:
 Cost depletion, or
 Percentage depletion
Cost depletion
pp. 324-325
 Estimate reserves
 Divide adjusted depletable basis by
remaining oil or gas to get unit cost
 Multiply unit cost by number of units sold
to get cost depletion deduction
Example 9.15
Adjusted basis
Barrels sold
Barrels remaining
p. 325
$22,000
5,000
35,000
Percentage depletion
pp. 325-326
 Allowed even if basis is zero
 Generally, 15% of gross income
 Cumulative percentage depletion for all of
the taxpayer’s properties is limited to his or
her taxable income from all sources
Gross income
p. 325
 Normally, royalty payment
 Does not include
 lease bonus or advance royalty payable
without regard to production
 delay rental payments and most land
damage payments
Taxable income from the
property
p. 325
Gross income from the property minus all
allowable deductions (except any deduction
for depletion or domestic production
activities) attributable to the mining
processes, including mining transportation
(gross income for most landowners)
Taxable income form all
sources
pp. 325-326
 Percentage depletion deduction for all
properties may not exceed 65% adjusted
taxable income from all sources for the year
 Adjustments
 net operating loss carrybacks;
 capital loss carrybacks;
 percentage depletion; and
 distributions to trust beneficiaries.
Example 9.20
Gross income
Royalty check (taxable income limit)
Adjusted taxable income
Percentage depletion (15% of $55,000)
Gross income limit ($120,000 × 65%)
Remaining basis ($22,000 - $8,250)
p. 326
$55,000
$51,700
$120,000
$8,250
$78,000
$13,750
Pipeline Right-of-Way
Easements
pp. 327-328
 Perpetual easement: right to lay, construct,
operate, maintain, inspect, remove, alter,
abandon in place, replace, relocate, and
reconstruct a pipeline
 Temporary easement: during construction:
rental income on Schedule E (Form 1040)
 Crop damage proceeds: ordinary income on
Schedule F (Form 1040) or Form 4836
Perpetual Easement Issues
pp. 327-328
 Payment for easement reduces basis in
land affected by the easement
 Payment in excess of basis is section 1231
gain
Issue 6: Repairs pp. 328-335
T.D. 9636: Amounts paid may be:
 Currently deductible or
 Capitalized
De Minimis Safe Harbor
p. 328
 Economic useful life < 12 months, or
 Cost < an amount specified by the
taxpayer ($500 or $5,000 limit)
De Minimis Safe Harbor
p. 329
 Must deduct amounts paid that are in
the safe harbor
 If the cost of property was deducted
under the safe harbor, gain on
disposition of the property is ordinary
income
Example 9.22: Accounting
Procedure
pp. 329-330
 Accounting procedure says < $400
 Elected safe harbor
 $350 power washer must be deducted
Q&A #1: Change in accounting procedure
does not require Form 3115
Example 9.22: Accounting
Procedure
p. 329
Q&A #2:
 10 heifers @ $400: must deduct
 7 heifers @ $450: must capitalize
Example 9.22: Accounting
Procedure
p. 330
Q&A #3:
 Accounting procedure says < $600
 $550 compressor is not in the safe
harbor
Example 9.23: AFS pp. 330-331
Richard has an AFS and qualifies for
$5,000 safe harbor
 Q&A #1: Program converts cash basis
to accrual basis
 Q&A #2: Cannot choose to capitalize 20
heifers on his tax return
Example 9.23: AFS
pp. 330-331
Richard has an AFS and qualifies for
$5,000 safe harbor
 Q #3: Chooses to capitalize 20 heifers
when he submits a financial statement
to his bank
 A #3: IRS could use anti-abuse
authority to deny $100,000 deduction
Improvements to Property
pp. 331-334
Amount paid is an improvement if it:
 Results in a betterment
 Restores the property
 Adapts the property
Example 9.24: Combine
pp. 331-332
 Deducted all $150,000 under IRC § 179
in 2012
 FMV in 2015 is $70,000
 Paid $10,000 to overhaul engine
Q&A #1:
Example 9.24: Combine
pp. 331-332
Q&A #1:
 Combine is the unit of property
 Overhaul is not an improvement
 Therefore, $10,000 can be deducted
Example 9.24: Combine
pp. 331-332
Q&A #2: Safe harbor election does not
prevent deduction
Q&A #3: Prior year determination does
not bind current year
Q&A #4: Form 3115 is not required
Example 9.24: Combine
p. 332
Q&A #5: Corn header is the unit of property.
Cost must be capitalized
Q&A #6: New snapping rollers are not an
improvement
Example 9.25: Replacement
tractor tires
p. 332
 Depreciated original tires as part of
tractor
 Unit of property is the tractor
 Replacement tires do not improve the
tractor
 Therefore, $12,000 can be deducted
Example 9.26: Restored
tractor
p. 333
 Inoperable tractor
 New tires are part of restoration cost
 $2,500 must be capitalized
Example 9.27: Barn roof
pp. 333-334
 $3,500 to replace cupolas
 Barn cost $200,000
 Average annual gross receipts are
$300,000
Cherry can deduct $3,500 under the small
taxpayer safe harbor
Example 9.27: Barn roof
p. 333
Q&A #1: Also paid $5,000 to paint the
barn
 Cannot use the small business safe
harbor
 Cupolas are not a significant portion of
the roof
 Paint is not an improvement
Example 9.27: Barn roof
p. 333
Q&A #2: Elected partial disposition of
building and deducted adjusted basis of
cupolas as a loss
 Must capitalize cost of new cupolas
 Can deduct cost of removing old
cupolas
Example 9.27: Barn roof
p. 334
Q&A #3: Replaced entire roof
 Must capitalize cost of new roof
 Partial disposition election does not
negatively affect treatment of new roof
Prepaid Expenses
pp. 334-335
Prior rules are still in place:
 Generally taxpayers must keep an
inventory [Treas. Reg. § 1.471-1]
 Generally, taxpayers must use accrual
accounting
 [Treas. Reg. § 1.446-1(c)(2(i)]
Exceptions for farmers p. 334
 Treas. Reg. § 1.471-6(a)
 Rev. Proc. 2001-10
 Rev. Proc. 2002-28
Limitations on Deducting Prepaid
Expenses
pp. 334-335
 IRC § 464
 Rev. Rul. 79-229
Repair regulations leave these rules in
place.
Example 9.29: Qualified farm
related taxpayer
p. 335
 $180,000 of current deductible expenses
 $100,000 of prepaid expenses
No IRC § 464 limit
Issue 2: Revoking a CCC
Loan Election
pp. 335-345
Rev. Proc. 2002-9 gives automatic
consent to revoking election to treat
loan as income.
Effect of Election
pp. 336-340
Example 9.30
 75,000 bushels of wheat
 $150,000 loan
 Made section 77 election
 Report on line 5a of Sch. F
Example 9.31: No section 77 election
Market Price > Loan Rate
pp.336-338
 Farmer will choose to repay the loan
and sell the commodity
 Tax consequences depend on
treatment of the loan
Example 9.32: Section 77
election and sale
p. 337
Schedule F (Form 1040)
Line 1a
262,000
Line 1b
150,000
Line 1c
Line 5a
Line 21b
112,000
150,000
1,200
Market Price < Loan Rate
pp.338-340
 Farmer will choose to redeem the
commodity by paying the posted county
price
 Farmer reports gain or loss from sale in
the year the commodity is sold
Example 9.34: Section 77 election,
redeemed
pp. 338-339






75,000 bushels of wheat
$150,000 loan
Made section 77 election
Redeemed for $135,000
Sold for $142,500
Form CCC-1099-G reports $15,000
Example 9.34: Section 77 election,
commodity redeemed pp. 338-339
Schedule F (Form 1040)
Line 1a
142,500
Line 1b
135,000
Line 1c
Line 4a
15,000
Line 5a
7,500
150,000
Example 9.35: No election,
commodity redeemed p. 339
Schedule F (Form 1040)
Line 2
142,500
Line 4a&b
15,000
15,000
Loan Deficiency Payment
p. 340
Farmers can choose to receive
a payment equal to the difference
between the loan rate and the PCP
Example 9.36: Loan
deficiency payment
Loan rate
PCP
LDP
Sale price
p. 340
$2.00/bu.
$1.80/bu.
$15,000
$142,500
Example 9.36: Loan
deficiency payment
p. 340
Schedule F (Form 1040)
Line 2
142,500
Line 4a&b
15,000
15,000
Changing the Election
pp. 340-345
Automatic consent
 File Form 3115 with return
 File signed Ogden office copy
 No user fee
Cut-off basis
 No adjustments for prior years
Issue 8: Marketing Loan Gain
p. 346-347
Taxpayers who report
CCC loan as income
reduce basis of commodity
by the amount of the
loan that is not paid.
Example 9.39: Marketing
Loan Gain
pp. 346-347
CCC loan
Paid off loan
Market gain
Sold corn
Basis
Gain on corn
$100,000
- 92,500
$ 7,500
$103,000
- 92,500
$ 10,500
Questions?