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Taxing Farmers

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					Taxing Farmers
Income Averaging,
 Self-employment
 (and some QPAI)
                Overview
• Income Averaging: Some Overlooked
  Opportunities
• Self-Employment Taxes: Selected Base
  Issues
  – Farmland rents?
  – Investment or Self-employment income?
• Section 199 Basics: Can Farmers Benefit?
           Income Averaging:
              The Problem
• Variable Income Streams
  – Production variation
  – Commodity price volatility
  – Variable expenditure patterns (e.g. § 179)
• Graduated Tax Rates
  – Effects exacerbated by phase-out provisions
• Fixed Annual Accounting Periods
            Income Averaging

• The Partial Solution: IRC § 1301
  – Added in 1997 after a decade-long absence
  – 1301 recomputes liability by reducing current
    year tax base by an elected amount and
    allocating it equally among three prior tax
    years.
  – You get tax savings if prior tax years have
    marginal rates lower than the current year
    rates.
      Taxpayer A: No Variation

                     Year 1:   Year 2:   Year 3:    Year 4:     Total      Average
      Tax Rates:     Income    Income    Income     Income      Income     Rate
               30%   $10,000   $10,000    $10,000     $10,000    $40,000
               15%   $10,000   $10,000    $10,000     $10,000    $40,000
               0%    $10,000   $10,000    $10,000     $10,000    $40,000
Total Income         $30,000   $30,000    $30,000     $30,000   $120,000



Total Tax             $4,500    $4,500     $4,500      $4,500    $18,000     15.00%
 Taxpayer B: Variation (No Avg)
                  Year 1:   Year 2:        Year 3:        Year 4:      Total        Average
   Tax Rates: Income        Income         Income         Income       Income         Rate
            30%        $0             $0             $0     $100,000     $100,000
            15%        $0             $0             $0      $10,000      $10,000
            0%         $0             $0             $0      $10,000      $10,000
Total Income           $0             $0             $0     $120,000     $120,000
Total Tax              $0             $0             $0      $31,500      $31,500     26.25%
        Variation + $60K Averaging

              Year 1:        Year 2:        Year 3:        Year 4:     Total
Tax Rates     Income         Income         Income         Income      Income       Tax Rate
        30%             $0             $0             $0     $40,000      $40,000

        15%     $10,000        $10,000        $10,000        $10,000      $40,000

         0%     $10,000        $10,000        $10,000        $10,000      $40,000
Total           $20,000        $20,000        $20,000        $60,000     $120,000
Tax              $1,500         $1,500         $1,500        $13,500      $18,000     15.00%



$20K allocated to Y1-Y3, capturing 10% and 15% rates “lost” in prior years
              Key Limitations:
• Equal amount assigned to each base year:
  recapture of lost marginal rates is not complete
  – For this reason, planners need to be familiar with
    other deferral provisions to smooth out single year
    variations as much as practicable.
• Averaging affects tax rates, not tax base for
  purpose of computing eligible tax benefits. Eg:
  – Bad: Still subject to section 68 limitation on itemized
    deductions even though averaging
  – Good: Allocation to base years does not trigger new
    limitations on itemized deductions
      Key Limitations: Cont‟d
• Taxpayers still lose other phase-out
  benefits, despite averaging.
• Self-employment tax base not affected by
  averaging.
• AMT: Jobs Act provides relief for 2004 ff.
• “Kiddie Tax” rate determined after election
  effects (benefit for taxpayer)
• Averaging election can be made for capital
  and ordinary income amounts.
             Eligibility:
          Farming business
• “cultivation of land or the raising or
  harvesting of any agricultural …
  commodity” 1.263A-4(a)(4).
• Custom harvesting is not farming
• Plant retailer not farming
• Regulations don‟t speak to custom feeding
  of animals – a common arrangement for
  livestock production
Some jurisdictions take food production more seriously than others.
          Eligibility: Individuals
• C-Corporations: No soup for you!
• Others: sole proprietor, partner, S-corporation
  shareholder, LLC member (unless taxed as C
  corporation)
• Entity activity, not individual activity, is critical.
   – Landlord may be eligible for crop share income,
     despite lack of material participation.
   – Careful, though, as C-Corp salaries don‟t count (but S
     Corporation salaries do! See Reg. 1.1301-1(e)(1))
Eligibility: Electible Farm Income
• Attributable to farming business
  – Follows parameters of farming outlined
    above.
  – Incidental activities can be included (e.g.,
    washing and packaging income) (1.263A-4)
  – Further processing cannot (e.g., income
    associated with processing wheat into pasta,
    or livestock into packaged meat)
     • Query: Is an allocation method permitted?
 Electible Farm Income: Cont‟d
• Example: Is a vineyard with a winery eligible?
  How about grinding hay before delivery to a
  feedlot customer? (common as further
  processing)
• Note that sales of business property “regularly
  used … for a substantial period” are eligible (but
  not farmland).
   – Such sales are regular occurrences in many farm
     operations (e.g., culling breeding herds)
   – Retiring farmers may thus benefit from some
     dispositions of property, but still face bunching of
     income on gains on sale of land (LTCG rate
     compensates somewhat for this concern.)
             Making the Election




Election can be made for any open year, regardless of whether
adjustment is made by the IRS for that year.


This approach allows nearly perfect hindsight, allowing taxpayers greater
flexibility to benefit from the election.
 Planning: Keep Looking Back!
• Consider elections for prior open years to
  shift income to earlier base years, thus
  increasing their capacity to “absorb”
  averaged income.
  – This could be helpful even if tax savings from
    election in that year are not achieved.
• Illustrations can be found in article
  appended to outline.
 Social Security: Self Employment
• Some Basics:
  – OASDI Taxes total 12.4%
  – Equal shares (6.2%) imposed on ER, EE (See
    I.R.C. § 3101, 3111)
  – Expanding tax base: $94,200 in 2006, up from
    $90,000 in 2005
  – Self-employed get to deduct half of self-
    employment taxes, approximating the
    treatment of employers who may deduct taxes
    paid on employees. (See I.R.C. §164(f))
 Social Security: Self Employment
• Medicare portion of 2.9 % applies without
  regard to the $94,200 limit.
• Combined tax is thus 15.3% up to
  $94,200, and $2.9% thereafter on eligible
  base.
• Big Picture: Significant Growth Here (See
  following slides for perspectives)
                                    Federal Government Receipts

                        3,000,000

                        2,500,000
  Dollars in Millions




                        2,000,000                           Other
                                                            Excise Taxes
                        1,500,000                           Social Insurance Taxes
                                                            Corporate Income Taxes
                        1,000,000                           Individual Income Taxes

                         500,000

                               0
                                90

                                93

                                96

                                99

                                02

                                05

                                08
                             19

                             19

                             19

                             19

                             20

                             20

                             20


                                        Fiscal Year




•Federal Government Receipts 1990-2004, 2005-10 (est.) (Source
White House Budget Office, FY 2006 Budget Historical Tables)
         Self-Employment Taxes:
                Overview
               Social Security Earnings Base

         $100,000
          $90,000
          $80,000
          $70,000
          $60,000
  Base




          $50,000                                                                         Earnings Base
          $40,000
          $30,000
          $20,000
          $10,000
               $0
                                        1976
                                               1981
                                                       1986
                                                              1991
                                                                     1996
                                                                            2001
                                                                                   2006
                    1937-50
                              1968-71




                                                      Year



Indexing base to wage growth > CPI (productivity gains in index)
                      2003 Individual Income Taxes

  50.00%

  40.00%
                                                             % of Returns
  30.00%
                                                             % of AGI
  20.00%
                                                             % of Tax
  10.00%

   0.00%
           0-25   25-50 50-100 100-200 200-500 500-   Over
                                               1000   1000
                             AGI ($000s)




(Source: IRS Statistics of Income, Fall 2005).
                     Taxpayer Impacts:
•       Taxpayers at lower income levels will often pay more in
        employment taxes than in income taxes.
    –         Top Earner: $14,412.60 in total employment taxes (including
              employer‟s share) in 2006.

•       Effect of cap on OASDI base makes this tax nominally regressive,
        but consider these facts:
          •      Social security benefits are also capped.
          •      Benefits are not proportional to contributions; lower-earning taxpayers get
                 proportionally more (a higher replacement rate) than higher-earning
                 taxpayers.

•       Taxpayers who can do so may find it economically advantageous
        to reduce self-employment taxes and invest the savings in
        alternative investments, including qualified retirement savings
        plans. (See below).
•       Reform proposals raise concerns about an expanding tax base and
        limited future benefits, perhaps leading to even more pressure for
        planning to reduce self-employment taxes.
  Self-Employment Income Base:
         Excluded Items
• IRC § 1402 excludes certain forms of
  income from the self-employment tax
  base. Clearly excluded are:
  – Capital gains & 1231 gains
  – Interest
  – Dividends
• All share common characteristic of
  derivation from capital, vs. labor or
  services
          Planning Benefit?
• Can taxpayer planning using capital-
  related exclusions provide net benefits
  over and above the social security benefit?

• Comprehensive cost/benefit analysis is
  exceedingly complex, but even a simple
  analysis shows real potential here.
Baseline Benefits: High Earner
MAXIMUM EARNER Assumptions:
Born: 6/15/1962
Current (2006) earnings: $94,200.00
Expected future benefits (depending on retirement
  age):
• 62 and 1 month in 2024 $2,896.00
• 67 in 2029               $4,854.00
• 70 in 2032               $6,665.00
• http://www.ssa.gov/cgi-bin/benefit6.cgi
 Baseline Benefits: Middle Earner
MIDDLE EARNER Assumptions:
Date of birth: 6/15/1962
Current (2006) earnings: $40,000.00
Expected future benefits (inflated):
  – 62 and 1 month in 2024 $1,825.00
  – 67 in 2029 $3,095.00
  – 70 in 2032 $4,284.00
  – http://www.ssa.gov/cgi-bin/benefit6.cgi
      Comparison of Benefits
Age 67 Benefits:
                    Monthly       Annual
• High               $4,854       $58,248
• Middle             $3,095       $37,140
• Difference         $1,759       $21,108

 (Note: above are retirement benefits only. This
 does not take into account differential value of
 disability coverage and death benefits for
 survivors.)
      What Do Benefits “Cost”?
Annual Tax Cost:
                   Rate      Base     Annual Tax
High               12.40%   $94,200      $11,681
Middle             12.40%   $40,000       $4,960
Tax Difference                            $6,721
  Estimated Investment Growth:
Estimated Future Value of Tax Savings With
  Lower SS Base Due to Planning:
Annual Interest Rate                         8%
Number of Payments                           23
Amount of Payment                     -$6,721
Future Value                        $409,252
          Comparative Reward:
Estimated Return on Investment (Post-Retirement)

       Return            Annual               Monthly
•      4.00%          $16,370.07             $1,364.17
•      6.00%          $24,555.10             $2,046.26
•      8.00%          $32,740.13             $2,728.34

vs.    SS benefit     $21,108                $1,759

Note: Above investment amounts assume legacy at death; no legacy
  from social security amount.
   Rental Income: the Quandry
• Rental income from real estate or property
  is connected to capital. An exclusion
  applies for rent, including crop shares, for
  those besides dealers in real estate.
• BUT the statute excepts rental income if
  there is an “arrangement” in which the
  landlord has “material participation” in the
  “production of agricultural or horticultural
  commodities” or management of such
  production.
              IRC § 1402(a)(1)
• [The Rental Exclusion does not apply to] any income
  derived by the owner or tenant of land if (A) such income
  is derived under an arrangement, between the owner
  or tenant and another individual, which provides that
  such other individual shall produce agricultural or
  horticultural commodities … on such land, and that there
  shall be material participation by the owner or tenant (as
  determined without regard to any activities of an agent of
  such owner or tenant) in the production or the
  management of the production of such agricultural or
  horticultural commodities, and (B) there is material
  participation by the owner or tenant (as determined
  without regard to any activities of an agent of such owner
  or tenant) with respect to any such agricultural or
  horticultural commodity
       “Fickle Finger of Fate”
• Material participation requirement was
  originally added to help farmers by getting
  them into the social security system.
• Times have changed.
            Ginsburg Rule:
• “Every stick crafted to beat on the head of
  a taxpayer will, sooner or later,
  metamorphose into a large green snake
  and bite the Commissioner on the hind
  part.“ Martin Ginsburg, The National Office
  Mission, 27 Tax Notes 99, 100 (1985))
        Taxpayer Corollary:
• A provision designed to single out
  taxpayers for special benefits may
  metamorphose into a critter that someday
  bites these taxpayers in the hind parts.
When you sense trouble, sometimes you just need to keep your
head down and keep moving.
    Rental Income: Separating Capital
            and Labor Returns
•    Can a sole proprietor reduce her self-
     employment tax base by leasing land
     that she owns to a spouse or to another
     entity?
     – McNamara v. Commissioner, 236 F.3d 410
       (8th Cir. 2000), reversing Tax Court in three
       combined cases: Bot, Hennen, &
       McNamara.
     – Each case involved payment of FMV cash
       rent on portion of land farmed by taxpayer
            Case Examples:
• McNamara:
  – Mr. owns corporation.
  – Mr. and Mrs. both hired as employees, with
    total wages of $30K
  – Mr. and Mrs. jointly own farmland rented to
    corporation. No material participation req‟d.
  – Corporation pays rent for farmland, with net
    rental income of $19-23K
           Case Examples
• Bot
  – Mr. owns 160 acres.
  – Mrs. owns 240 acres.
  – Mr. employs Mrs. in farming operation, and
    she rents her acres to him. No material
    participation required in the agreement.
  – Mrs. gets $15K/year wages, $18K/year rent.
            Case Examples
• Hennen
  – Similar arrangement to Bot – with Mrs. leasing
    her acres to Mr. and employment
    arrangement with Mrs.
  – Lease silent on participation.
             Tax Court:
      Arrangement > Agreement
• “While the concept of an agreement certainly
  includes a contractual agreement, it is a broader
  concept that would also include other forms of
  agreements not necessarily arising from strict
  contractual relationships. Consistent with its
  dictionary definition, in most of the instances
  where it is used in the Internal Revenue Code,
  the word "arrangement" refers to some general
  relationship or overall understanding between or
  among parties in connection with a specific
  activity or situation.”
      Tax Court: Policy Supports
          Broader Tax Base
• “In determining whether compensation is
  includible in self-employment income under
  sections 1401-1403 such provisions are to be
  broadly construed so as to favor coverage for
  Social Security purposes.”
• “The rental exclusion in section 1402(a)(1) is to
  be strictly construed to prevent this exclusion
  from interfering with the congressional purpose
  of effectuating maximum coverage under the
  Social Security umbrella.”
              8th Circuit:
• Taxpayers did materially participate.
• However, Court was open to proof re:
  connection between participation and
  lease.
• What does it mean to be “derived under an
  arrangement”?
                8th Circuit:
• “Rents that are consistent with market
  rates very strongly suggest that the rental
  arrangement stands on its own as an
  independent transaction and cannot be
  said to be part of an „arrangement‟ for
  participation in agricultural production.” Id.
  at 413. The market rate exception, though
  not in the statute, is a “practical effect of
  the „derived under‟ language.” Id.
             8th Circuit
• Remanded to hear proof on FMV. No one
  chose to retry issue. TC holds for
  taxpayers – no deficiency.
• IRS: Nonacquiescence.
                 IRS Nonacq.
“If, under the overall scheme of farming operations it was
 understood that the farmer would materially participate in
 farm production, and the farmer did in fact materially
 participate, then the income received from the lessee is
 subject to self-employment tax. The Service continues
 to believe that this is the correct result regardless of
 whether the material participation was explicitly called for
 under the written or oral lease. This interpretation best
 promotes Congress‟ intent that farmers who must work
 for a living have their income replaced through coverage
 under the social security system.”
               IRS Position
• Essentially, Farmers are in a worse position than
  other businesses.
• E.g., Author of one article on this topic opens
  discussion with fact that his company rents his
  office from him, allowing service income to be
  segregated from capital.
• Policy of expanding base overrides horizontal
  equity between similarly situated taxpayers?
  (Recall the statute does single out this group)
         Some observations
• Taxpayers here behaved reasonably.
  They paid for labor, and they did not inflate
  rental values.
• Rents were fixed and in cash, not
  dependent on production returns (which as
  discussed below may be problematic).
• Note that even interspousal arrangements
  were respected; a corporate entity was not
  required.
Post-McNamara Taxpayer Loss
• Solvie, T.C. Memo 2004-55
  – Taxpayers formed corporation and leased
    land and hog production facilities to it.
  – Expanded facilities involved per animal
    payments to owners/employees. (Hog
    production requires labor, which taxpayers
    provided.)
  – Fixed rents for other land ($29K) and facilities
    ($21K) dwarfed by per animal pmts. ($44K)
  Solvie: Partial Taxpayer Loss
• Court finds:
  – Failure of proof that payment was FMV rent
    for building.
  – Connection between production activity by
    Solvies and payment. (Problem for crop
    share arrangements?)
  – But note: IRS concedes propriety of exclusion
    of other rent not dependent on this production
    activity.
    What About Partnerships?
• Mizell v. Commissioner, T.C. Memo 1995-
  571 involved a partnership between father
  and sons, in which father sought to
  exclude crop share rentals for farmland
  from self-employment income. Tax Court
  analyzed this in terms of arrangement,
  much like Bot/McNamara. (In fact, Mizell
  is cited for this approach).
 Alternative Partnership Approach:
• Section 1402 is clear that self-employment
  income includes “[a partner‟s] distributive share
  (whether or not distributed) of income or loss
  described in section 702(a)(8) from any trade or
  business carried on by a partnership of which he
  is a member.”
• Traditional partnership arrangements
  contemplate profit as a product of capital and
  labor. Guaranteed payments for services or
  capital provide a means to segregate these
  components. See I.R.C. § 707(c). However, that
  segregation is for limited purposes.
Partnership Approach: Cont‟d
  • 707(c) provides that guaranteed payments are
    “considered as made to one who is not a member
    of the partnership, but only for the purposes of
    section 61(a) (relating to gross income) and,
    subject to section 263, for purposes of section
    162(a) (relating to trade or business expenses).”
    (Note that 1402 is absent!)
  • See also Treas. Reg. § 1.707-1(c): “For the
    purposes of other provisions of the internal
    revenue laws, guaranteed payments are regarded
    as a partner‟s distributive share of ordinary
    income.”
           What About LLCs?
• Partnership tax structure seems problematic based on
  above analysis. (Even non-farming businesses could
  face challenges.)
• Disregarded entity status also presents uncertainty:
  could a bachelor accomplish the same tax benefits that
  the Bots and Hennens did?
• One commentator (Sowell) suggests segregating capital
  into S corporation in order to ensure segregation of
  capital income. (Substance> Form challenges?)
• Uncertainty here may gravitate toward use of corporate
  entity. (Choice of entity considerations are complex).
Cooperatives and Self-Employment
             Income
  Bot v. Commissioner, 353 F.3d 595 (8th Cir.
  2003), affirming 118 T.C. 138 (2002), involved
  the question of whether self-employment taxes
  applied to value-added payments from a
  farming cooperative paid to members. The
  Eighth Circuit affirmed the Tax Court‟s finding
  that these payments represented income from
  carrying on a trade or business through
  agents, and thus were not excluded from the
  self-employment tax base.
                       Bot – cont‟d
•       Bots (“retired” farmers?) owned interests in
        cooperative for corn processing.
    –     Retirement was potentially contestable due to arrangements
          with sons that resembled partnership activities. IRS did not
          challenge this, however.
•       Members could meet obligations to deliver corn to
        cooperative (MCP) from three different sources: (1)
        deliver own production; (2) purchase from others; or
        (3) acquire corn from MCP through an “option pool”
        arrangement, which involved corn purchased by the
        MCP for the purpose of helping members meet their
        delivery obligations. In each case, the Bots used
        option pool corn, paying MCP an acquisition fee of five
        cents per bushel.
                       Bot- cont‟d
• Bots received payments for “value added” production by
  cooperative, which they characterized as STCG.
• IRS said pmts. were self-employment income. Bots
  carried on a trade or business of acquiring and selling
  corn and corn products for profit through the cooperative.
   – It appears that they delivered substantially more grain than they
     were capable of growing and receiving through crop share (700
     acres x 150 bushels x ½ share = 52,500 bushels of production.
     Their option pool corn fees of $18,070 at five cents per bushel
     translates into 361,400 bushels – more than 7 times as much.)
• They chose cooperative, not corporation. Thus, they
  carried on business through agents and earnings s/t self-
  employment tax.
      Other Cooperative Issues
• Fultz brothers faced similar case – also losing (p. 14-15).
  They did not respect the corporate form, and instead
  received pmts individually and assigned them to corp.
• Would different result obtain if retired farmer delivered
  crop share rental to cooperative? (Magnitude issue
  presented in Bot vs. means of disposing of rental
  share?)
• See Felber v. Commissioner, T.C. Memo 1992-418, aff‟d
  without published opinion, 998 F.2d 1018 (8th Cir. 1993)
  (retired wheat farmer whose tenant sold crop share on
  his behalf not subject to self-employment tax)
• What of patronage dividend from passive rental activity
  (e.g., based on fertilizer share)?
    Section 199 Issues: Can Farmers
                Benefit?
•    Basic Provisions.
      •   Deduction percentage.
          – 2005-06: 3 percent
          – 2007-09: 6 percent
          – 2010 ff.: 9 percent.
      •   Deduction base. The deduction is a percent of
          the lesser of:
          – Qualified production activities income (QPAI) (see
            below) or
          – taxable income (or for individuals, adjusted gross
            income subject to certain adjustments). See I.R.C. §
             199(a); (d)(2).
                 199 Basics
•   What is QPAI? Domestic production gross
    receipts (DPGR) – sum of specified costs.
    (See § 199(c)(1)).
•   DPGR: gross receipts derived from “any lease,
    rental, license, sale, exchange, or other
    disposition of (I) qualifying production property
    which was manufactured, produced, grown, or
    extracted by the taxpayer in whole or in
    significant part within the United States ….”
    I.R.C. § 199(c)(4)(A).
          199 Basics cont‟d
• Qualifying production property (QPP)
  includes “tangible personal property”.
• The scope of “manufactured, produced,
  grown, or extracted” (MPGE)
  encompasses crops or livestock grown by
  farmers within DPGR. See Prop. Reg. §
  1.199-3(d)(1)(including “cultivating soil,
  raising livestock, [and] fishing” in MPGE).
              199 Basics – cont‟d
• MPGE also includes “storage, handling, or other
  processing activities (other than transportation activities)
  within the United States related to the sale, exchange, or
  other disposition of agricultural products, provided the
  products are consumed in connection with, or
  incorporated into, the MPGE of QPP whether or not by
  the taxpayer.”
   –    However, the taxpayer must be doing more than packaging to
       qualify.
• Grain storage fees are specifically covered in an
  example in the regulations as included within DPGR.
  See Prop. Reg. 1.199-3(d)(5) Example 1.
         199 Basics – cont‟d
•   Wage limitation: deduction allowable is
    in any case limited to the “W-2 wages of
    the employer for the taxable year.”
    I.R.C. § 199(b). (Section 4.02(1)(a) of
    Notice 2005-14 and §1.199-2(a)(1) of the
    proposed regulations confirm that this
    includes common law employees, not
    independent contractors, partners, or
    self-employment income.)
              199 Basics – cont‟d
• Regulations clarify that only one taxpayer may obtain the deduction
  under section 199 for production. Reg. § 1.199-3(e)(1):

  “If one taxpayer performs a qualifying activity … pursuant to a
   contract with another party, then only the taxpayer that has the
   benefits and burdens of ownership of the property under Federal
   income tax principles during the period the qualifying activity occurs
   is treated as engaging in the qualifying activity.

   – Will custom feeding qualify? Unlikely to meet benefits and
     burdens test.

   – Sale of feed would qualify, however, raising allocation issues.
          199 Basics- cont‟d
•   Pass-through entities. Deductions are
    applied at the “shareholder, partner, or
    similar level.” See id. § 199(d)(1)(A). W-
    2 wages are also allocated for this
    purpose to the partner level, subject to
    additional limitations. See id. §
    199(d)(1)(B).
           199 Basics- cont‟d
• Cooperatives. A special rule exists in 199(d)(3)
  to address the issue of agricultural cooperatives
  (as in Bot and Fultz, above). To the extent the
  cooperative is engaged MPGR of an agricultural
  or horticultural product, or marketing of such
  products, and a patronage dividend or per-unit
  written allocation taxable to the patron under
  1385(a)(1) or (3) is received, then patrons are
  allowed to take the deduction under section 199.
Some Important Issues for Farmers
•   Wage Limitation.
•   Contract production may not count.
•   Sole proprietors may get nothing if they don‟t pay
    employees.
•   Members of farming partnerships or LLCs, who do not
    receive W-2 wages, and who provide the bulk of
    services to the partnership may also not benefit from
    this deduction to the extent W-2 wages paid to others
    are not significant.
•   Corporate formation may allow advantages, especially
    to the extent that wage payment allowed.
       Farmer Issues - § 199
• But note: increasing salaries to get
  greater 199 deduction may not make
  sense if higher employment taxes result.
• Farmers who are not engaged in a trade
  or business (i.e., retired farmers who rent
  land) are not eligible.
       Farmer Issues- § 199
• DPGR Examples:
  – Livestock or crops – in
  – Custom work – out
  – Hedging transactions – in
  – Special retail food/beverage rules (see
    outline)
• Note: 5% de minimis rule allows you to
  treat all income as DPGR.
• Otherwise, allocation is required.

				
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