AGRI-BUSINESS DECISIONS:

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1 AGRI-BUSINESS DECISIONS: December 2013 SECTION 1031 (LIKE-KIND) EXCHANGES Before a taxpayer finalizes the sale of property or assets, they should consider and be informed on the tax deferred benefits of a Section 1031 like-kind exchange. This especially applies to the sale of land and other real estate. Internal Revenue Code (IRC) Section 1031 provides the governance of like-kind transactions and is a tax deferred, not tax free, exchange. Gain is deferred until the replacement property is sold. The taxpayer s basis in their relinquished property becomes the basis in their replacement property. In order to defer the entire gain, the total purchase price of the replacement property must be equal to, or greater than the total net sales price of the relinquished property. If not, the taxpayer could still qualify for partial tax-deferral treatment. The net sales price does not include the repayment of any mortgage or notes payable. These payments are considered as if the cash was received by the taxpayer. Like-kind exchanges are found in three different structures: Inside this issue: Section Agricultural Payroll Reporting 2 Use Tax 3 Affordable Care Act 4 Farm Income Averaging 5 Simultaneous exchange of one property for another Deferred exchange Meet Our Ag-Team 6 Reverse exchange We will focus on the deferred exchange as it is the most common, but the other two options are available and may be considered under the proper circumstances. All three structures should employ the use of a qualified intermediary to protect the tax deferred treatment on the exchange. Your attorney cannot act as an intermediary, but may initiate and complete the legal paperwork. To qualify for a like-kind exchange, both the relinquished and replacement property must be used in a trade or business, or for investment. They also must be of the same nature, character, or class. For instance, real property cannot be exchanged for personal property; the most common being Land for Land. The proceeds from the sale of the relinquished property are held by the qualified intermediary. The taxpayer is required to identify potential replacement properties within 45 days from sale of relinquished property. The taxpayer then must close on the replacement property before the earlier of 180 days after the transfer of the relinquished property or the due date of the taxpayer s federal income tax return, including extensions. The IRS offers no exceptions to these time limits. If the Section 1031 exchange involves related parties, such as a parent, child, spouse, or entity in which the taxpayer or his relatives own greater than 50%; both parties must hold their replacement property for two years. Taxation is very much like dairy farming. The task is to extract the maximum amount of milk with the minimum amount of moo. And I'm afraid to say, that these days, all I'm getting is moo. Terry Pratchett - With Section 1031 exchanges, each exchange transaction is unique to the circumstances and should include a qualified IRC 1031 advisor. If you have any further questions, please contact your accountant. -David G. Olson, CPA/CVA -Deb Nies, CPA

2 AGRI-BUSINESS DECISIONS: AGRICULTURAL PAYROLL REPORTING REQUIREMENTS Form Employer's Annual Federal Tax Return for Agricultural Employees Farmers are required to file Form 943 if they meet one or both of the following requirements: -They pay an employee cash wages of $150 or more in a year for farm work -The total (cash and noncash) wages that they pay to all farmworkers is $2,500 or more Form 943 must be filed by Jan 31 st for the prior year. If the total tax that you owe for the year is less than $2,500, then you are allowed to pay the amount due with the form. If the total tax due is more than $2,500, then you are required to make payments via EFTPS on no less than a quarterly basis Social Security tax rate is 6.2%. Medicare tax rate is 1.45%. The employer matches both taxes EFTPS payments are due on the 15 th of the month following the period you are paying for All W-3 and W-2 forms should reconcile to Form 943 SD Form 21 - Employer's Quarterly Contribution, Investment Fee and Wage Report This form is used to report paid wages and pay SD Unemployment Tax (SUTA) Farmers are required to file Form 21 if they meet one or both of the following requirements: -They paid ag wages of $20,000 or more in any calendar quarter -They employed 10 or more individuals for some portion of a day in each of 20 different calendar weeks For 2013, only the first $13,000 you pay to each employee is subject to SUTA taxes The tax rates for SUTA vary depending on the employer and are provided by the Department of Labor each year Form Employer's Annual Federal Unemployment (FUTA) Tax Return Farmers are required to file Form 940 if they meet the same requirements for SUTA For 2013, only the first $7,000 you pay each employee is subject to FUTA taxes The tax rate is 0.6% Form 940 must be filed by Jan 31 st for the prior year. If the total tax that you owe for the year never reaches $500, then you are allowed to pay the amount due with the form. If the amount you owe exceeds $500 for the year, you will need to make payments via EFTPS on a quarterly basis. Those payments are due on the 15 th of the month following the quarter. Form W-2 and W-3 - Wage and Tax Statement Every employer engaged in a trade or business who pays remuneration for services performed by an employee must file a W-2 for each employee Anyone required to file Form W-2 must file Form W-3 to transmit Copy A of Forms W-2 Copies B and C must be furnished to employees by January 31st Copy A, accompanied by Form W-3, must be furnished to the Social Security Administration office by February 28 th Employers must have an Employer Identification Number (EIN) from the IRS if paying wages Form 1099 s and MISC (Miscellaneous) & 1099-INT (Interest) are the most common forms used Report payments made in the course of a trade or business totaling $600 or more per person/vendor during the year for Rent, Services, Non-employee Compensation (commissions, machine hire, contract labor), Interest, and various other situations -Personal payments are not reportable -Do not report payments to corporations -Tangible items received for these payments are not reportable (hay, seed, feed, cattle) -Intentional non-filing penalties are $250 per return (1099) with no maximum! Copies must be furnished to recipients by January 31 st IRS copy must be mailed by February 28 th Lisa Brown, ELO Bookkeeping Manager

3 USE TAX THE OFTEN OVERLOOKED TAX Use tax is paid to the South Dakota Department of Revenue by purchaser rather than seller. Use tax is applicable when sale tax isn t charged on the original sale. Some examples are as follows: Purchasing farm machinery out-of-state Farm machinery delivered into South Dakota, even if supplier charges another state s sales tax When possession is taken out-of-state and purchasers pays other state s sales tax no use tax is due if the other state s sales tax is the same or more than South Dakota s. If it s less, the difference is due in use tax The South Dakota Department of Revenue can look back five years for unpaid use tax. This can result in significant interest and penalties. You could be assessed a 10% penalty plus 18% interest for each year up to five years (10% plus 18% x 5 years = 100%). The following is an example from South Dakota Department of Revenue: A farmer buys a $250,000 piece of equipment out-of-state and brings it home to South Dakota to use. The farmer can voluntarily pay the $10,000 use tax. OR When the Department of Revenue discovers a copy of the invoice, the farmer receives a bill for the tax plus penalty and interest Year 1 - $12,800 ($10, % penalty + 18% interest) Year 2 - $14,600 ($10, % penalty + 36% interest) Year 3 - $16,400 ($10, % penalty + 54% interest) Year 4 - $18,200 ($10, % penalty + 72% interest) Year 5 - $20,000 ($10, % penalty + 90% interest) Total paid- $82,000 If you have any questions, please contact your accountant. -Deb Nies, CPA Is the IRS looking at you?

4 AGRI-BUSINESS DECISIONS: HEALTHCARE ACT (KNOWN AS THE AFFORDABLE CARE ACT) Reporting on Forms W-2: Employer Information reporting effective 2015 (optional (i.e.: voluntary) reporting for 2014 in preparation for 2015) Employers report cost of employer-sponsored group health insurance on Form W-2 -Box 12 -Code DD -No reporting on Form W-3 -Include both portion paid by employer and portion paid by Employee -Do not give a Form W-2 solely to report insurance coverage Items that must be included on Form W-2, Box 12, Code DD -Major medical -Health FSA value for plan year in excess of employee s cafeteria plan salary reductions -Hospital indemnity or specified illness, paid through salary reduction (pre-tax) or by employer -Domestic partner coverage included in gross income Reporting employer cost of coverage does not mean it is taxable! -For informational purposes only -Shows employees the value of their health care benefits -Employees use it to compare health costs at the Market Place as needed Additional Medicare Tax: Additional 0.9 % Medicare tax is imposed on individuals that have wages that exceed $200,000 for the year. The employer calculates and withholds this additional tax when processing payroll. Net Investment Income Tax: Net Investment Income Tax goes into effect in Tax of 3.8% is imposed on certain net investment income of individuals, estates, and trusts that have income above the thresholds below. -Some examples of income subject to the Net Investment Income Tax are: interest, dividends, capital gains, rental, royalty income, non-qualified annuities, etc. Penalties imposed for not having health insurance: 2014 $95/per uninsured person or 1% of household income (whichever is higher) 2015 $325/per uninsured person or 2% of household income (whichever is higher) 2016 $695/per uninsured person or 2.5% of household income (whichever is higher) -Ashley Thompson, Bookkeeper Farming is a profession of hope -Brian Brett Filing Status Threshold Amount Married filing jointly $250,000 Married filing separately $125,000 Single $200,000 Head of household (with qualifying person) $200,000 Qualifying widow(er) with dependent child $250,000

5 FARM INCOME AVERAGING As many of you are probably aware, farmers have a wonderful tax savings tool available to them, Farm Income Averaging. Farm income averaging is the ability for qualified farmers to shift eligible farm income from the current year equally over the prior three years. This will become more important over the next couple of years with the creation of the highest 39.6% tax bracket. Since this is a new bracket for 2013, many high income producers will be able to save 4.6% for a couple of years. The mechanics of farm income averaging is not complex. The basic concept is that a taxpayer can take qualified farming income and shift it back equally over the prior three years, at the tax bracket the taxpayer was in for those years. Qualified farm income includes income from the Schedule F, 4797, and capital gains from the sale of farm assets (excluding land sales). An example of the tax savings is shown in the exhibit below. The tax savings is only on income tax; this will not save on self-employment tax. That said; the tax savings may be significant if the producers are able to plan and manage their income. If you can hold income down for two or three years, you may be able to blow through the self-employment tax limits; thus reducing the self employment tax liability over a four year average. Make sure to ask your preparer if farm income averaging is an option that has been utilized for you. 20X2 20X1 20X0 20X9 Taxable Income $ 170,000 $ 35,000 $ 34,000 $ 32,000 Elected Farm Income (100,000) 33,000 33,000 33,000 Adjusted Taxable Income $ 70,000 $ 68,000 $ 67,000 $ 65,000 Income Tax $ 10,500 $ 10,200 $ 10,050 $ 9,750 Tax as Originally Computed -- (5,250) (5,100) (4,800) Additional Tax 14,850 $ 4,950 $ 4,950 $ 4,950 Income Tax Liability $ 25,350 Income Tax Without Averaging $ 34,560 Income Tax With Averaging (25,350) Income Tax Savings From Averaging $ 9,210 -Jonathan Guenthner, CPA

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 DAVID G. OLSON, CPA/CVA ELO founding partner 36 years of experience & specializes in: personal and business financial planning new company development entity taxation succession planning business valuation JONATHAN GUENTHNER, CPA ELO Staff Accountant 8 years of experience & 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 and Chamberlain. 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 income over $250,000? If so, starting in 2013 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, and capital gains (not related to a trade or business). If you have any questions regarding this new change please contact our office. *Depreciation Limits: 2013 Section 179 $500,000 Bonus 50% on new equipment 2014 Section 179 $139,000 (adjusted for inflation) Bonus Not Available Agri-Business Team Jay Tolsma, CPA Pam Olinger, CPA Deb Nies, CPA Agri-Business Bookkeeping Team Lisa Brown Laura Beaver Ashley Thompson John Thomson Gwen Toering *Subject to change with future legislation. If you would like any more information regarding our Agri-Business teams you may review their full profile at our website: