Tax Time 2012

It is time again to be thinking of income taxes. IRS in its continuing effort to close the tax gap (the gap between income tax paid and the income tax that ought to be paid, estimated to be over $300 billion) is requiring increased documentation on capital gains (and a new Form 8949) and stepping up audits on capital gains. Congress has also stiffened reporting requirements and penalties on foreign held assets. Because the penalties are so high ($10,000 minimum for inadvertent misreporting; $100,000 or half the balance of the account, whichever is greater, for intentional misreporting), I cannot prepare your tax return if you hold any assets outside of the United States. On the positive side, conversions from traditional retirement plans to Roth IRAs are no longer limited by income and taxpayers with gross income less than $57,000 and access to the internet are eligible for free tax preparation and filing. IRS requires mileage logs for vehicles with business use; standard mileage rates for 2011: Jan 1 to June 30 July 1 to Dec 31 Iowa Business: 51¢/mi. 55.5¢/mi. “ Medical & moving: 19¢/mi. 23.5¢/mi. “ Charitable 14¢/mi. 14¢/mi. 39¢/mi. You are required to send a Form 1099 to any individual, partnership or LLC that you paid $600.00 or more for services, rent or interest. Payments to cooperatives, banks and other corporate entities are excluded. Wages in excess of $150 in any quarter require the filing of Forms W-2 and W-3. If you would like us to prepare these forms, you will need to provide us with the information before January 27, 2012. If you have questions on any of the above or other tax matters feel free to call, e-mail, or stop in. When you have your records ready you may let us know and we will set up an appointment that is convenient for you. Evening or Saturday appointments can be arranged. Pursuant to U.S. Treasury Regulations, you are hereby advised that any federal tax advice included in this communication is not intended or written to be used, and cannot be used, to avoid any U.S. federal tax penalties or to promote, market, or recommend to another party any transaction or matter. For further information, see IRS Circular 230.

Liz Mathis for Iowa Senate

Those of you who favor progressive economic development in Iowa should consider supporting Liz Mathis in her bid to fill the vacant Iowa Senate seat in the Marion/Robins/Hiawatha area.* Her webpage is http://www.mathis4statesenate.com/

* Thank you for the correction IowaWineGuy!

2011 Farm Cash Rent Update

© _ _ _ Now is the time dictated by Iowa law to begin negotiating crop land leases for 2012 or at least notify your tenant/landlord, as the case may be, if you wish to change any of the terms in your current leas. (Remember that mutual consent is required if you want to make changes in the middle of a multi-year lease.)
_ _ _ If you wish to terminate a cropland lease ending March 1, 2012, and have not already done so, you must serve notice in the manner set out in Iowa Code §562.7 on or before September 1, 2010. This statute does not apply to forage land leases (pasture and hay) or custom farming arrangements, but by tradition, many farm operators have come to expect notice by September 1 and may become surly or even confrontational if notice is delayed past that date.
_ _ _ Basing cropland rent on the CSR (“corn suitability rating” or in some regions “crop suitability rating”) of the soil in question is the most accurate and fair way to arrive at a comparable rent [See Computing a Cropland Cash Rental Rate: http://www.extension.iastate.edu/Publications/FM1801.pdf]. As Hertz Farm Management, Inc., has noted, cash rental rates have tended to lag behind the run up in farm land prices [http://www.hfmgt.com/newsletter/pdf/2011summer.pdf]. Below is a table of farmland values and cash rents from last year's ISU surveys in counties for which I prepare farm land leases:

_ _ _ There is considerable variation, because the quality of the farmland sold does not necessarily correlate with farm leases that were surveyed, either of which might vary from the county's average CSR. In addition, these figures do not reflect the sharp increase in farm land values since last year. Below is a table of farmland sales for Adair County in the spring of this year:

_ _ _ If you throw out the bargain sales and the “through the roof” sales, you see a floor of about $66.66/CSR pt for middling 50 CSR ground and a median range of $73 to $110 / CSR pt for better quality farmland which would predict rent in the $160 to $400/acre range (assuming the historic 4-5% return on investment on farmland). That coincides with the negotiated farmland leases I have written this year, which fall in the following table:

CSR RANGE * * * * * * * MEDIAN RENT/CSR pt
_ 45-55 . . . . . . . . . . . . . $2.20 - 2.80
_ 56-65 . . . . . . . . . . . . . $2.75 - 3.25
_ 66-75 . . . . . . . . . . . . . $3.20 - 3.50
_ 76-85 . . . . . . . . . . . . . $3.30 - 3.60
_ 86-99 . . . . . . . . . . . . . $3.50 - 3.80

_ _ _ This is a considerable jump from the $3/pt that predominated the rents on good quality farm land in this area for the last couple of years. This has sparked considerable interest in flexible or variable rent leases, including hybrid share leases, bushel leases, and net share leases. These types of leases are more complex than cash rent leases, but allow the landlord to share in the returns (as well as the risks) of production and if properly structured afford the landlord the opportunity to take advantage of special use valuation in the event federal estate tax is a concern (current exemption is $5 million per individual or $10 million per married couple).
_ _ _ Good luck with your negotiations! _ _ _ ©2011

Our Complicated Tax Code

If you wonder why I sometimes have a bewildered look when you ask a tax question, here is a clue: In her 2008 Annual Report to Congress, the National Taxpayer Advocate, Nina Olson, complained about the Tax Code’s complexity including (among many other examples) “at least 16 separate incentives to encourage taxpayers to save for retirement. These incentives are subject to different sets of rules governing eligibility, contribution limits, taxation of contributions and distributions.” She also criticized the constant changes, pointing out that amendments to the Tax Code were made at the rate of more than one per day in the five years from 2003–2008. Read her report: http://www.irs.gov/advocate/article/0,,id=202276,00.html [Vol. 11, No. 1 Choate’s Notes Spring 2009]

I don't have very much good to say about the Reagan Administration. If you want to see where our federal debt trouble began look there. However, one of the things it got right was the Internal Revenue Code of 1986. It closed a lot of loopholes and greatly simplified our income tax. It was far from perfect, but it was a great leap forward. Since then, we have lost a lot of ground.

Renegotiating Farm Leases

Now is the time dictated by Iowa law to begin negotiating crop land leases for 2011 or at least notify your tenant/landlord, as the case may be, if you wish to change any of the terms in your current lease. (Remember that mutual consent is required if you want to make changes in the middle of a multi-year lease.)
Basing cropland rent on the CSR (“corn suitability rating” or in some regions “crop suitability rating”) of the soil in question is the most accurate and fair way to arrive at a comparable rent [See Computing a Cropland Cash Rental Rate: http://www.extension.iastate.edu/Publications/FM1801.pdf]. As was the case last year, I think $3/pt will catch most of the rents on good quality farm land in this area. This does not mean rent for your particular farm should go down, if the rent you charge has been stagnant or lagged behind the run up in recent years. At a minimum, you want to keep up with inflation. Increased rain this year has resulted in a tighter supply of quality hay and correspondingly higher demand for hay land for next year.
If you wish to terminate a cropland lease ending March 1, 2011, and have not already done so, you must serve notice in the manner set out in Iowa Code §562.7 on or before September 1, 2010. This statute does not apply to forage land leases (pasture and hay) or custom farming arrangements, but by tradition, many farm operators have come to expect notice by September 1 and may become surly or even confrontational if notice is delayed past that date.
There is some uncertainty regarding whether mailed notice will be sufficient to terminate a farm lease because of an Iowa Supreme Court case this year ruling that mailed notice was unconstitutionally insufficient due process to give to a residential renter in an eviction case. I believe certified mail is still a constitutional form of notice under Iowa Code chapter 562, so long as it is mailed early enough that you know it will arrive before September 1. However, the Iowa Supreme Court has not ruled on that question. If you want to be absolutely certain that you have given adequate notice, you should either have a signed acknowledgment of notice from the opposing party (landlord or tenant) or you should have notice personally served by law enforcement or a private process server.

Staying out of trouble online

Here is a good article about staying out of trouble (both ethical and practical as well as legal) while using the internet: Doing the Right Thing -- 5 Tech Pitfalls by Dan Reilly

CASH RENT FARM LEASES

Now is the time dictated by Iowa law to begin negotiating crop land leases for 2010 or at least notify your tenant/landlord, as the case may be, if you wish to change any of the terms in your current lease. (Remember that mutual consent is required if you want to make changes in the middle of a multi-year lease.)

Rents this year are leveling off or declining, in general. Rent on one farm I am involved with that always has competition among renters, went from $250/acre to $230/acre, this year. On the other hand, rent for a farm with a CSR in the low 60’s went from $175/acre to $200. [See also Cash Rental Rates for Iowa 2009]. The huge corn acreage, rising input costs and the slow economy are causing farm operators to bid more conservatively. Nevertheless, low interest rates and fear of inflation continue to keep land values high, which directly impacts farm rental rates.

This does not mean rent for your particular farm should go down, if the rent you charge has been stagnant or lagged behind the run up in recent years. At a minimum, you want to keep up with inflation. Not doing so is like putting your money in a savings account and paying the bank interest to keep it there. Though low, inflation as measured by the CPI was 3.8% last year and had been hanging around 3% for the four years previous. If you only raise your rent every 3 or 4 years, you should consider raising your ask by 10-12.5% just to catch up with inflation.

Basing cropland rent on the CSR (“corn suitability rating” or in some regions “crop suitability rating”) of the soil in question is the most accurate and fair way to arrive at a comparable rent [See Computing a Cropland Cash Rental Rate]. As was the case last year, I think $3/pt will catch most of the rents on good quality farm land in this area.

If you wish to terminate a cropland lease ending March 1, 2010, and have not already done so, you must serve notice in the manner set out in Iowa Code §562.7 on or before September 1, 2009. This statute does not apply to forage land leases (pasture and hay) or custom farming arrangements, but by tradition, many farm operators have come to expect notice by September 1 and may become surly or even confrontational if notice is delayed past that date.

Speaking of pasture, the increase in corn acreage in recent years has resulted in a tighter supply of pasture land and correspondingly higher prices.

Good luck with your negotiations!