Updates on a Few Posts
Remember in the example, the farmer is showing this as a hedging transaction. If the farmer treats it as a hedge and later the IRS determines it is not a hedge, the result in that situation is the worst for the farmer.
In that case, any income from the transaction will be ordinary income and any loss will be treated as a capital loss. Income is included on Schedule F and subject to SE tax. Any loss is reported on Schedule D and if the net loss is greater than $3,000, you can only deduct $3,000 per year.
Now if the farmer properly reflects it as speculation, then any gain is reported on Form 6781 and the gain is automatically treated as 60% long-term and 40% short-term. This is very favorable since most contracts are not held for a year.
The bottom line is if a farmer has a hedge and is proper, all income or loss is ordinary. If the farmer has a hedge that really is speculation, then income is ordinary and loss is capital.
Our second update is on the new Farm Bill Decision Tool from Texas A&M. Bart Fisher sent me an email. He was part of the House Ag Committee for several years but is now part of the team at Texas A&M.
He indicated that since there is still 10 months until the end of the corn and soybean MYA discovery period, the software will continue to run its calculations of final prices both up and down and will apply that in calculating both estimated ARC and PLC payments.
However, the tool does allow the user to plug in estimated 2019 and 2020 yields for the county and the tool will use this to calculate estimated ARC-CO payments.
The bottom line, for now, you can override estimated yields for the county, but the price you input will not be static. The tool will continue to apply optimization to the final estimates.
As you get closer to the March 2020 sign-up, the variability in prices will likely drop substantially. There really is little reason to sign up before about February. You should have a much better idea of county yields and final estimated MYA prices by then.
Paul Neiffer is a certified public accountant and business advisor specializing in income taxation, accounting services, and succession planning for farmers and agribusiness processors. Paul is a principal with CliftonLarsonAllen in Walla Walla, Washington, as well as a regular speaker at national conferences and contributor at agweb.com. Raised on a farm in central Washington, he has been immersed in the ag industry his entire life, including the last 30 years professionally. Paul and his wife purchase an 180 acre ranch in 2016 and enjoy keeping it full of animals.
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