Farmers tax problems – Farmers Tax Relief Help

Offsets in Senate Finance’s farm bill include Schedule F loss limits, optional self-employment tax, and information reporting

Mike Habib, EA

On April 18, the Senate Finance Committee conferees on the farm bill announced $2.4 billion of reforms/offsets – “double the reforms in the House or Senate bills alone” that could be used to fully offset the farm bill. These reforms/offsets (along with a slight decrease in the ethanol tax credit) would include:

    • Preventing the use of farm losses as a tax shelter. This provision would address the use of complex farming operations to reduce taxable income by limiting the amount of Schedule F (agricultural) losses that can be use to reduce non-agricultural business income. Agricultural losses would be limited to $200,000, if the taxpayer receives any Farm Bill commodity payments. A farmer’s or rancher’s ability to use agricultural losses against their agricultural gains wouldn’t be limited.
    • Allowing farmers to pay additional self-employment taxes to qualify for Social Security. This provision would modify the farm optional method so that farmers and ranchers can pay more in optional self-employment taxes (and so be eligible for Social Security benefits). Qualifying for Social Security benefits can be difficult for self-employed farmers and ranchers because they don’t always have a steady stream of income. When there are no earnings, no Social Security taxes are paid and no quarters are accrued. The payment thresholds in the farm optional methods, in which farmers and ranchers can voluntarily pay Social Security taxes in order to earn quarters (and so receive Social Security benefits), are outdated and no longer allow farmers and ranchers to earn enough Social Security credits per year.
    • Ensuring that farmers know their tax obligations. The provision would requires the Commodity Credit Corporation (CCC) to always provide IRS and the farmer with information returns showing the amount of market gain the farmer realizes when he repays a CCC market assistance loan. As a result, income that is subject to information reporting would be less likely to be underreported to IRS.

    In addition to the above, Senate conferees are committed to $600 million more in agriculture tax-related reforms to complete the package.

    In response to word that House conferees would score any temporary tax provision as if it were permanent, Senate Finance Committee Ranking Member Chuck Grassley (R-IA) complained that this imposed a double standard because none of the 5-year spending proposals were considered as if they were permanent. In particular, Grassley noted that this approach overlooked that the largest agricultural tax revenue raiser, a reduction in the ethanol credit, is temporary, expiring at the end of 2010 (roughly the same period as some of the temporary tax relief provisions in the bill). Grassley objected that if the House was going to look at the agricultural tax package over ten years, then the same test should be applied on the spending side.