AGRI-BUSINESS DECISIONS:

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1 AGRI-BUSINESS DECISIONS: November 2014 STRATEGIC CONSIDERATIONS OF SUCCESSION PLANNING Succession planning and estate planning require careful consideration of the goals and objectives of those individuals involved with the planning process. Equity owners eventually face the issue of transference of control and ownership of their business interests. Consideration is given to family participation, equity value, timing of transfer, method of payment and net tax consequence. For many business owners, the transfer of their equity interest is a major component of their retirement plan. Matters to consider when evaluating the personal and business objectives of a succession or estate plan include: Goals and Objectives Is there a preferred buyer? Are employees prospective buyers? Are family members prospective owners? What is the preferred timing of ownership transfer? Will be there be a partial or complete transfer of ownership interests? How dependent are the owners on the net sale proceeds for their retirement needs? Will real estate transfer differently from other operating assets? If equity transfer involves children, will there be consideration for non-business children? Inside this issue: Strategic 1 Considerations Agricultural Payroll Reminders & Updates 2 The Affordable 3 Care Act & You 2014 Farm Bill 4 Prepaid Expenses and Crop 5 Insurance Meet Our 6 Ag-Team Tax Consequence Understanding the tax consequences of the sale/transfer of an ownership interest is a primary concern in the structuring of a succession or estate plan. Consideration should be given to projected tax costs and after tax net proceeds. Like-kind exchanges under Sec 1031 are an option if tax deferral or investment alternatives are an objective. Organizational Structure Does the company have a defined organizational structure? Are there key employees other than ownership? Do employees have an interest in ownership? How is the company owned? What is the desired ownership structure? Operating Strengths Review and identify the strengths of the organization. Consideration should be given to financial position, available financing, capital needs and investment, and debt levels. Management skill levels, including oversight over production, marketing and sales, risk management and financial should also be considered. Labor Market Consideration should be given to the labor market including desired skill levels, availability, direct cost and benefits. Anticipated change in labor demand should also be considered. -- David G Olson, CPA/CVA There were 5,637 farms in the state of South Dakota that were larger than 2,000 Acres US Farm Census

2 AGRI-BUSINESS DECISIONS: AGRICULTURAL PAYROLL REMINDERS & UPDATES Form 943 Employer s Annual Federal Tax Return for Agricultural Employees Required to be filed if either applies: Employee received cash wages of $150 or more in a year for farm work OR Total cash and noncash wages paid to all farmworkers is $2,500 or more Social security tax rate is 6.2% for each the employee and employer, unchanged from Medicare tax rate is 1.45% for each the employee and employer, unchanged from 2013 If the total tax owed is less than $2,500 for the year, you are allowed to pay the amount due with the form. If the total tax due is more than $2,500 for the year, you are required to pay the liability via EFTPS on no less than a quarterly basis EFTPS payments are due on the 15 th of the month following the period you are paying for (ex: July-Sept payroll tax liability is due Oct 15 th ) Form SD 21 Employer s Quarterly Contribution, Investment Fee and Wage Report (SD Unemployment Tax (SUTA) used to report wages paid in South Dakota; must be filed quarterly) Required to be filed if either applies: Agricultural wages were paid totaling $20,000 or more in any calendar quarter OR Employment of 10 or more ag workers for some portion of a day in each of 20 different calendar weeks For 2014, the first $14,000 of wages paid to each ag worker is subject to the tax Tax rates vary depending on the employer and may be updated by the Department of Labor each year Form 940 Employer s Annual Federal Unemployment (FUTA) Tax Return Same filing requirements as SUTA: For 2014, the first $7,000 of wages paid to each ag worker is subject to the tax, unchanged from 2013 Tax rate is 0.6% on the total taxable wages of all ag workers If the total tax owed is less than $500 for the year, you are allowed to pay the amount due with the form. If the total tax due is more than $500 for the year, you are required to the liability via EFTPS on a quarterly basis EFTPS payments are due on the 30 th /31 st of the month following the period you are paying for (ex: July-Sept payroll tax liability is due Oct 31 st ) Due Dates If requirements apply, Forms 943, SD 21, and 940 must be filed by January 31 st Forms W-2 and W-3 Each employee that is paid wages in the course of your trade or business must be furnished with a completed Form W-2, along with a transmittal Form W-3 remitted to the IRS If paying wages, employers must have an Employer Identification Number (EIN) from the IRS Copies of W-2 s must be furnished to employees by January 31 st. The IRS copies of W-2 s and W-3 must be mailed by February 28 th Form 1099 s and 1096 Each recipient that received payments (rents, services, interest) of $600 or more in the course of your trade or business must be furnished with a completed Form 1099 (ex: Form 1099-MISC or 1099-INT), along with a transmittal Form 1096 remitted to the IRS Copies must be furnished to recipients by January 31 st. The red IRS copies must be mailed by February 28 th Failure to file the required Forms 1099 results in a $250 penalty per disregarded 1099 with no maximum REMINDER: Generally, corporate recipients of nonemployee compensation need not receive a 1099; however, there are corporations that should receive a 1099 for their services regardless of their entity type. For example, fees paid to a lawyer, or services provided by a veterinarian, who is not your employee. Laura Beaver, Associate Lisa Brown, Bookkeeping Manager Employer-provided Health Benefits: As you may remember from last year, sponsors of the Agri-Plan employer-sponsored HRA plans were required to file IRS Excise Tax Form 720 with a fee of $1 per plan participant. As of 2014, if you are a one-employee Agri-Plan sponsor, you are no longer required to file this form and pay the fee. A warning for business owners with 2 or more employees: If you are using a Section 105 medical reimbursement plan (HRA) to subsidize employee healthcare costs and you are not offering the plan to all employees, you are now in violation of the Affordable Care Act (ACA) mandates and are subject to a penalty of $100 per day per employee.

3 The Affordable Care Act & You Under the Affordable Care Act (ACA) (also known as Obamacare ), the individual mandate requires farmers to obtain and maintain minimum essential coverage (MEC) for themselves and dependents. Because of the changes associated with the ACA, many farmers and farm businesses may be paying health insurance premiums for the first time in 2014 or may have faced increased premiums to comply with the ACA mandates. Under the Tax Code, the self-employed (SE) farmer may claim a deduction for health insurance costs. Deductible premiums include those paid for the farmer, the farmer s spouse, their dependents and children who have not reached age 27 by the end of the year (even if the child was not a dependent of the farmer). In order to qualify for this deduction, the farmer must meet any one of the following requirements: Have net profit on Schedule F (or other self-employment profit) Used one of the optional methods on Schedule SE to calculate net self-employment earnings Is a partner in a partnership which has net SE earnings showing in box 14 of Schedule K-1 of the partnership return Is a greater than 2% shareholder in an S-Corporation and has received a W-2 that shows health insurance premiums paid or reimbursed by the S corporation Farmers that obtain coverage through the Marketplace exchange may qualify for the Premium Assistance Credit (PAC) if the farmer s household income is between 100% and 400% of the federal poverty guideline. The federal poverty guideline income amount varies depending upon the number of persons in the farmer s household. Generally, farmers who receive a PAC will need to reduce the amount of health premiums deductible by the amount of PAC for which they are eligible. The rule prevents the farmer obtaining a deduction and a credit for the same cost of coverage. An adjustment is necessary because the SE health insurance deduction reduces the farmer s income, potentially qualifying the farmer for a larger PAC. A larger PAC, however, will reduce the amount of health premium deductible. This circular mathematical relationship between deductible premiums and the PAC amount the farmer may qualify for will require a special mathematical adjustment to arrive at the correct amount of deductible premiums for farmers obtaining a PAC from Marketplace-obtained coverage. If you do not have qualifying coverage for yourself, spouse or any of your dependents, and do not qualify for an exemption, you will be required to make an Individual Shared Responsibility payment (sometimes referred to as a penalty), which is due when you file your annual income tax return. The 2014 payment is the greater of: 1% of your household income above your tax return-filing threshold, rising to 2% in 2015 and 2.5% in later years, OR A flat-dollar amount, which is $95 per adult and $47.50 per child for any month without coverage or exemption, limited to a monthly maximum of $285. For further information, please contact your accountant and/or insurance provider. Pam Olinger, CPA

4 AGRI-BUSINESS DECISIONS: THE NEW 2014 FARM BILL Most agri-producers are aware that on February 7, 2014, President Obama signed the Agricultural Act of 2014 (Farm Bill) into law. It is a five-year bill that will be in place through the fiscal year There are many parts to the Farm Bill; however, this article will only focus on the ones that had major effects on agri-business. The first major change imposed by the new Farm Bill was the repeal of many of the prior programs. The programs repealed include, but are not limited to : Direct Payments (DP) Counter Cyclical Payments (CCP) Average Crop Revenue Election (ACRE) With the repeal of the above mentioned programs, the 2014 Farm Bill introduced two new programs: Agricultural Risk Coverage (ARC) - a risk management tool that addresses revenue loss Price Loss Coverage (PLC) - a risk management tool that addresses deep multiple year price declines With these two programs, there are a number of decisions that farmers are going to have to make over the next few months: Which program to choose - ARC or PLC? If you choose ARC, is it county-wide coverage or individual coverage? Which commodities do you put in which program? All of these decisions could have a noticeable impact on your operations. Before March 31, 2015, producers will make a onetime (Farm Risk Management Election) election. This election is irrevocable for the crop years. Even though producers must make this one time election, FSA will continue to hold annual signups for changes in ownership, AGI, or other necessary revisions. If a producer fails to make an election for the 2014 year, they will lose the 2014 payment and be automatically enrolled in the PLC program for The decisions that producers need to make before March 31 st will have a fairly significant impact on their operations over the next few years. Below are the links to a number of calculators that may be helpful: There are a number of dates to keep in mind when making decisions as relates to which program is right for you: Reallocation of Base Acres September 29, 2014 to February 27, 2015 Farm Risk Management Election November 17, 2014 to March 31, 2015 Contracts for Crop Years Mid April 2015 to Summer Crop Year Payments October 2015 Other important items that came from the new Farm Bill: Changes in Adjusted Gross Income (AGI) limits: Under the previous Farm Bill there were several sets of AGI Limits Under the new Farm Bill there is only one limit if the three year average of your AGI is over $900,000, you will not be in compliance with the AGI Limits and will not be eligible for program payments. Reinstatement of the Livestock Disaster Assistance program retroactively back to 2011 If you have any questions, please feel free to contact our office. Jonathan Guenthner, CPA

5 PREPAID EXPENSES AND CROP INSURANCE Prepaid Farm Expenses: As many of you are aware, cash basis farmers are allowed to pay for expenses for next year and deduct them in the current year. This can be a good tool to use in tax planning at year end. Prepaid farm expenses include the following items if paid for prior to year end: feed, seed, fertilizer, farm supplies, etc. that are not used or consumed during the year. Deduction Limit: If you use the cash method of accounting to report your income and expenses, your deduction for prepaid farm expenses in the year you pay for them may be limited to 50% of the 3-year average of total deductible farm expenses. Exceptions to the Deduction Limit: The limit on the deduction for prepaid farm expenses does not apply if you are a farmrelated taxpayer (your main home is on a farm OR your principal business is farming OR a member of your family meets the 1 st or 2 nd requirement) AND either of the following applies: Your prepaid farm expense is more than 50% of your other deductible farm expenses because of a change in business operations not caused by unusual circumstances. Your total prepaid farm expense for the preceding three tax years is less than 50% of your total other deductible farm expenses for those three tax years. This allows a farmer to have prepaid expenses in excess of 50% of other expenses for a year as long as the average prepaid expense for the preceding three years is less than 50% of your total other deductible expenses for those three years. Crop Insurance: Crop insurance is an issue that agri-producers deal with on an annual basis. Due to the amount of inclement weather we have had around the state this year, here is an update on the crop insurance rules. To elect to defer crop insurance and disaster payments to the following tax year, farmers must: Use the cash method of accounting Establish that it is their normal business practice to report more than 50% of income from the sale of the commodity in a later year. The claim is received in the year of loss (if you receive the year after, you cannot defer) In order for crop insurance proceeds to be deferrable, payment under an insurance policy MUST result from damage to crops or the inability to plant crops. Therefore, if a farmer receives insurance payments from insurance coverages such as revenue protection, revenue protection with harvest price exclusion, yield protection, and group revenue protection, these insurance payments cannot be deferred. Occasionally, an insurance payment is based on both crop loss and price loss. If that is the case, the farmer can only defer the portion intended as reimbursement for crop loss. The election to defer crop insurance proceeds is all or nothing. Farmers may not allocate the proceeds between two tax years. Farmer s cannot defer one crop and claim income on another crop. All insurance proceeds must be claimed or deferred regardless of the type of crop. If a farmer wants to defer one crop but not the other, there must be two sets of records for each type of crop. Aaron Moller, Associate

6 Meet ELO s Agri-Business Team Leaders Mitchell Office 1820 N Sanborn Blvd PO Box 249 Mitchell, SD p f Chamberlain Office 316 Sorensen Dr. Chamberlain, SD p f Sioux Falls Office 4804 S Minnesota Ave #101 Sioux Falls, SD p DAVID G. OLSON, CPA/CVA ELO founding partner 38 years of experience and specializes in: personal and business financial planning new company development entity taxation succession planning business valuation JONATHAN GUENTHNER, CPA ELO Agri-business Manager 9 years of experience and specializes in: taxation, specializing in ag tax agri-business planning and consulting compilation and reviewed financial statements YOUR SUCCESS IS OUR BUSINESS We are a progressive CPA firm with locations in Mitchell, Chamberlain and Sioux Falls. In addition to the tax, auditing, and accounting services traditionally provided by CPAs, we also provide management advisory services and accounting software support for various accounting packages. Is your Adjusted Gross Income over $250,000? If so, you may be subject to an additional 3.8% Medicare tax on all unearned income in excess of $250,000. Unearned income for this purpose includes: interest, dividends, rental income, capital gains (not related to a trade or business), and any other passive activity income. If you have any questions regarding this tax-law change, please contact our office. *Depreciation Limits: 2014 Section 179 $25,000 Bonus Not Available 2015 Section 179 $25,000 Bonus Not Available *Subject to change with future legislation. Agri-Business Team Jay Tolsma, CPA Pam Olinger, CPA Bob Rauenhorst Aaron Moller Laura Beaver Agri-Business Bookkeeping Team Lisa Brown John Thomson Gwen Toering Karlee Tiesler If you would like more information regarding our Agri-Business team members you may review their full profile at our website: