- Tax Planning -

Update: Farmer Tax Breaks

The Emergency Economic Stabilization Act-2008 benefits
farmers as well as the “Street.”

By David P. Webb
and D. Nathan Smith

Editor’s note: “Fertile Ground For Tax Savings,” which outlines recent tax legislation that creates opportunities for farmers and others in agribusiness, was published in the October/November 2008 issue of Corn South. Following are updates:

On Oct. 3, 2008, President Bush signed into law the Emergency Economic Stabilization Act of 2008. Although the primary purpose of the legislation was to provide relief to troubled Wall Street businesses, the Act also provided a number of new tax breaks for individuals and businesses, along with extensions of existing tax cuts. Many of these tax cuts are available to farmers, and some of the tax incentives were specifically enacted for the benefit of farmers.

Increased AMT Exemption
The Act patched the alternative minimum tax (AMT) yet again. For tax year 2008, the AMT exemption amounts are as follows:

• $69,950 for spouses filing jointly or surviving spouses (increased from $66,250 in 2007).
• $46,200 for single persons (increased from $44,350 in 2007).
• $34,975 for spouses filing separately (increased from $33,125 in 2007).

The Act also provides an extender for a patch that allows certain nonrefundable personal credits to offset the AMT. Applicable credits include the child and dependent care credit, the credit for the elderly and disabled, the child tax credit and the Hope and Lifetime Learning credit.

Extension Of Options To Deduct Sales Taxes
The Act extends until 2010 the option for taxpayers to deduct state and local sales taxes paid as opposed to state income taxes paid.

Addition To Standard Deduction For Real Property Taxes
Taxpayers who choose to utilize the standard deduction are allowed an additional deduction for real property taxes paid. This deduction is in effect for the 2008 tax year only. The deduction is equal to the lesser of $500 for single persons and $1,000 for married joint return filers or the amount that would be allowed for real property tax deduction under itemized deduction rules.

Tax-Free Distributions From IRAs
The Act extends for 2008 and 2009 the ability to make tax-free distributions from an IRA for charitable contributions when the following criteria are met: 1. The distribution is made to a taxpayer who is at least 70 years old. 2. The IRA distribution is made directly to a charitable organization (exclusive of private foundations). The tax-free distribution is capped at $100,000 per year.

Charitable Deduction For Apparently Wholesome Foods
The Act extends the “Apparently Wholesome” food contribution deduction to contributions made in 2008 and 2009. “Apparently wholesome” foods are defined in the tax law as food that is intended for human consumption and meets all quality and labeling requirements of law, but which is not readily marketable due to age, freshness, surplus, etc.

Under the Act, contributions of apparently wholesome foods to charities by qualified farmers or ranchers are treated as “qualified conservation contributions,” which are deductible under Sec. 170. Generally, in calculating the deduction for charitable gifts of ordinary income type property, the amount of the contribution must be reduced by the amount that would have been recognized as gain. However, the Code allows an enhanced deduction for contribution of apparently wholesome foods equal to the lesser of (a) its basis plus half of the property’s appreciation, or (b) twice the property’s basis.

In the case of a farmer, qualified conservation contributions are deductible at up to 100 percent of the farmer’s taxable income, as opposed to the 50 percent limitation that exists for standard charitable deductions. Unused deductions may be carried forward up to 15 years.

Energy Incentives For Businesses
The following tax credits may be available to farmers depending on the nature of their business:
Energy Credit. The business energy credit under Code Section 48 applies to solar energy property, fuel cell property and microturbine property. This credit has been extended through Dec. 31, 2016, and now includes combined heat and power system property, qualified small wind turbine property and geothermal heat pump systems.

Energy-Efficient Appliance Credit. Certain energy-efficient appliances, including dishwashers, clothes washers and refrigerators, are eligible for tax credits under Section 45M. The Act expands the appliances available for the credit and extends the availability of the credit.

Biodiesel and Renewable Diesel Credits. Income and excise tax credits are currently available for biodiesel and renewable diesel fuels. The Act extends the availability of the credits until Dec. 31, 2009, and increases the amount of the credits.

Alternative Fuel and Fuel Mixture Credits. The Act expands the currently existing fuel and fuel mixture credits to include compressed or liquefied natural gas and alternative fuel used for aviation. The credits are extended until Dec. 31, 2009.

15-Year Write-Off Provided For Qualified Leasehold Improvements And Qualified Restaurant Property Extended For Two Years And Liberalized
Under pre-Act law, qualified leasehold improvements and qualified restaurant improvements that were placed in service before Jan. 1, 2008 are depreciated over a 15-year straight-line period, as opposed to the typical 39 years.

The Act extends the availability of this short depreciation period to qualified leasehold improvement property and qualified restaurant property that is placed in service through Dec. 31, 2009. The Act also extends the 15-year depreciation period to “qualified retail improvement property,” which is defined as an improvement to an interior portion of nonresidential real property if the portion is open to the general public and is used in the retail trade or business of selling tangible personal property.

Wooden Practice Arrows Used By Children
Arrows sold after Oct. 3, 2008, are exempted from the excise tax when:
• They consist of all natural wood without laminations/enhancements to increase spine.
• They are 5/16 of an inch or less in diameter.
• They are unsuited for use in a bow that draws 30 lbs or more.

 

National Disaster Tax Relief

The Act, for the first time, provided prospective disaster tax relief for any federally declared disaster area, which occurs between Dec. 31, 2007, and Jan. 1, 2010. Farmers should bear in mind each of the following tax relief provisions, which will be available in a federally declared disaster area:

Increased Individual Casualty Loss. Current law provides a casualty loss that is limited by a $100 per casualty floor and a 10 percent of adjusted gross income floor for all casualty loss deductions claimed. In federally declared disaster areas, the 10 percent floor is waived entirely, but the $100 per casualty floor jumps to $500 per casualty.

Qualified Disaster Expenses. Typically, costs that are incurred in cleanup and environmental remediation must be capitalized. In federally declared disaster areas, these costs may be deducted in the year incurred. Taxpayers should note, though, that recapture provisions will apply to the amounts deducted under this provision if the property is later disposed of.

Extension of NOL Carryback. Net operating losses (NOLs) may be carried back up to two years under current law. When NOLs are properly carried back, taxpayers are often eligible for a refund from a prior year. In federally declared disaster areas, the carryback period is extended to five years when the NOLs are created by casualty losses and qualified disaster expenses.

Bonus Depreciation. Businesses may deduct a full 50 percent of the cost of acquired property, real and personal, in federally declared disaster areas, provided the property is placed in service on or before Dec. 31, 2011, for personal property and Dec. 31, 2012, for real property. These accelerated depreciation deductions are exempt from the alternative minimum tax but are subject to recapture provisions.

Increased Expensing. Current Code Section 179 provides that businesses may expense in the year of purchase up to $250,000 of the cost of new tangible property or computer software used in the trade or business. In federally declared disaster areas, the expensing ceiling is increased by the lesser of $100,000 or the cost of qualified Section 179 disaster property acquired. Thus, a maximum of $350,000 of the cost of tangible property or computer software may be deductible in the year of purchase.

One-Year Extension For New Markets Tax Credit
Under the Act, the New Markets Tax Credit, which applies for qualified equity investments to require stock in a community development entity or CDE, i.e. any domestic corporation or partnership whose primary purpose is serving or providing investment capital for low income communities or low income persons and which maintains accountability to residents of low income communities through representation on governing or advisory boards of the CDE and is certified by the Treasury Department as an eligible CDE.

The new Act extends the New Markets Tax Credit through 2009.

Accelerated Depreciation For Certain Farming Business Machinery & Equipment
Machinery or equipment used in the farming business and the original use of which commences with the taxpayer is eligible for an accelerated five-year depreciation period. Accelerated depreciation is available for pro-perty placed in service after 2008 and before 2010. Grain bins, cotton ginning assets, fences and other land improvements are not eligible for accelerated depreciation.

Qualified Tuition Deduction
The Act extends until Dec. 31, 2009, the above-the-line deduction for tuition and related expenses paid to an institution of higher education. The deduction is available for tuition paid for the taxpayer’s education or a dependent’s for whom the taxpayer may claim a personal exemption.

David P. Webb and D. Nathan Smith are tax attorneys with Baker, Donelson, Bearman, Caldwell & Berkowitz, PC in its Jackson, Miss., office.