Editor’s note: The following was written by Charles Brown, Iowa State University Extension farm management specialist, for the university’s Ag Decision Maker November 2018 newsletter.
Many primary ag lenders spent the past few winters restructuring existing farm loans to stretch out principal payments and free up depleted working capital. These same lenders might be reluctant to restructure loans anytime soon without a commitment from the borrower to improve their cash flow management to meet existing debt obligations.
Farms without access to typical operating loans should use caution before advancing family living and farm-related expenses on credit cards or higher interest-bearing debt.
For bushels you plan to store, the
USDA Farm Service Agency offers a low-interest, nine-month non-recourse marketing loan on harvested grain. On-farm stored bushels will need to be measured, and commercially stored grain be placed under a warehouse receipt.
This marketing loan amount is limited to your county loan rates, which in
Iowa are typically below the national loan rates of $1.95 per bushel for corn and $5 per bushel for soybeans, respectively. Thus, the marketing loan program is not a marketing strategy for cash grain, just access to cheaper interest rates for up to nine months.
Beware of the tax consequences when using the USDA nonrecourse marketing loan. If you have declared the loan as income in a past year, then you have to declare it as income in later years or file Form 3115 — change of accounting method — to change back to a loan for income tax purposes.
To free up cash and possibly some loan obligations, some farmers may be entertaining the idea of selling some assets. Making a list of essential and nonessential assets would be a good way to start. Many of us probably have assets that are no longer used or may have become outdated for the operations of today.
A few years ago, I visited with a farmer who decided to have a small farm auction, and he cleaned out his machine shed and the old fence row behind the barn. His neighbors started stopping by and asking about renting his farm — they thought he was selling out. When making the decision on what to sell, be careful about selling productive assets. Those assets that are producing the income for the farming operation should be the last ones sold.
That doesn’t mean that we can’t look at alternatives. Maybe at today’s commodity prices, we cannot justify owning a combine that is used just a few weeks during the year. Hiring it custom done might be a better financial alternative.
Beware of tax consequences when selling assets. In the case of selling farm machinery, the recapture of depreciation is ordinary gain, not capital gain. The difference is that ordinary gain is taxed at whatever tax bracket the taxpayer falls into. Capital gain has a maximum rate of 0 percent, 15 percent or 20 percent, depending on the taxable income of the tax payer.
Use the example of a combine that was purchased in 2010 for $200,000 and is now fully depreciated and has a $0 basis. If that combine is sold in 2018 for $100,000, that income is all ordinary gain and subject to the same income tax percentage as the other farm income. It is not subject to self-employment tax.
A change in the tax laws for 2018 is the 199a deduction. The 199a deduction can become very complex, but in general a farmer will get to reduce their farm income — Schedule F — by 20 percent. Ordinary gain from the sale of machinery is included in the calculation as farm income, but not capital gain.
Again, I am simplifying a complex portion of the tax code.
If assets have liens against them, make sure to visit with your lender before selling the assets. Make arrangement to have a portion of the income from the sale set aside to cover the income tax obligations. You don’t want to be in the position of having all the proceeds go to the lender and be left with no money to pay the taxes.
Everyone’s situation is different, so always visit with your accountant and tax preparer to determine the tax consequences before making the sale. You don’t want to have any surprises after the fact.