Volume 8, Number 11 - November 2002

This Month in Ag Connection

• Livestock Compensation Program
• Farm Bill Decisions Necessary
• How Does The Cash Flow?
• Year-End Income Tax Planning Tidbits

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Livestock Compensation Program

Agriculture Secretary Ann M. Veneman recently announced that approximately $752 million is being made available to livestock producers in the form of drought relief assistance. While the majority of row crop acreage will be covered by crop insurance, livestock producers have relatively few risk management tools available. This program is being offered due to the lack of opportunities for livestock producers to mange risk. According to the most recent National Agricultural Statistics Service (NASS) pasture and rangeland condition report, 26 states reported at least 50% of pasture and rangeland rated as "poor" or "very poor."

Payments are based upon the number of eligible livestock owned as of June 1, 2002. Livestock must have been owned for 90 days or more before and/or after that date. Eligible livestock and payments rates are based upon $18 per animal consuming unit (indexed against beef cattle) and are as follows:

Eligible Livestock	Payment/Head
Beef Cows	$18.00
Dairy Cows	$31.50
Stockers	$13.50
Buffalo & Beefalo	$18.00
Sheep	$ 4.50
Goats	$ 4.50

To sign-up contact your local USDA Farm Service Agency county office. Payments are to be made available shortly after sign-up.

(Author: Wesley Tucker, Agriculture Business Specialist)

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Farm Bill Decisions Necessary

Decisions made now will greatly affect farm income for at least the next six years and possibly beyond. Therefore, time invested this fall evaluating your options may pay big dividends. Remember, there are five base acreage options to choose from and four yield options available. Several good management tools are available for evaluating each of these options and their forecasted payments over the next six years (be sure to use a current tool from a reputable source). Your local Extension Agriculture Business Specialist can assist you with using these decision support tools and help you understand the various components of the farm bill. The following information is what is required for each farm unit to use with most decision models:

County Origin of Farmland	__________
Total Farmland Acres	__________
Total CRP Acres	__________
Total Double Crop Acres	__________

Eligible Crop	Previous 2002 PFC Base Acres	Previous 2002 PFC Yield
Corn
Soybean
Wheat
Other

Eligible Crop	Planted and Preventive Planted Acres				Average Yield
	1998	1999	2000	2001	1998	1999	2000	2001

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How Does the Cash Flow?

The Farm Security and Rural Investment Act of 2002 (The New Farm Bill), not only has new terms and payments, but also has different timing and payment rates. It is important for farmers to know when the payments can be expected and make any necessary arrangements with lenders.

Keep in mind everyone that participates in the program will receive direct payments. Counter cyclical payments are based upon price, so there may or may not be a payment. may or may not be a payment. As of September 27, USDA has announced there will be no October (2002) advanced counter cyclical payment for wheat, corn, grain sorghum, barley, oats and soybeans, based on forecasted market prices for this crop marketing year (2002-2003). See table below.

October 2002	- Final DP for 2002 crop (less avanced AMTA) - Adv. 35% of estimated CCP for 2002
December 2002	- Adv. 50% DP for 2003
February 2003	- Adv. 35% estimated CCP for 2002
July 2003	- Final CCP for 2002 small grain crop
October 2003	- Final DP for 2003 - Final CCP for 2003 corn & soybean - Adv. 35% estimated CCP for 2003
December 2003	- Adv. 50% DP for 2004
CCP = Counter-Cyclical Payment (based on price, so there may be times with no payment) Adv. = Advanced (these payments are optional and the producer can elect to not take them and take 100% with the final payment) Note: Persons must be signed up prior to receiving any 2002 Farm Bill payments

This calendar of dates indicates there could be a big cash crunch in the next few months. Many farmers elected to take their whole PFC payment for 2002, which means their final Direct Payment for 2002 will be fairly small (amount of oilseeds added and the difference in rate changes). There will not be any advanced counter cyclical payment this fall due to higher market prices and no LDP payment this fall, due to higher prices. Farmers will have the option of receiving up to 50% of their 2003 Direct Payment in December 2002 if they are signed up in the new program. That is a change from previous years, where farmers had the option to receive 100% advance payment in the old PFC program.

The new program is going to cause transition/cash flow pains the next several months. It is extremely important to study the program and determine when you will receive payments.

(Authors: Wesley Tucker and Mary Sobba, Agriculture Business Specialists)

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Year-End Income Tax Planning Tidbits

The close of another tax year is approaching - now is the time for taxpayers to calculate their year-to-date taxable income, estimate income and expenses for the balance of the year, and to consider appropriate adjustments. Provisions in the Economic Growth & Tax Relief Act of 2001 (2001 Act), the Job Creation and Worker Assistance Act of 2002, and the 2002 Farm Bill are creating many changes and conditions under which year-end tax planning will likely pay substantial dividends. The following are some of the tax issues for which you will want to be aware.

• Additional 30% First-Year Depreciation: The Job Creation and Worker Assistance Act of 2002 provides for an additional 30% first-year depreciation for the taxable year in which qualified property is placed in service. In general, qualified property is an asset: (1) property where the original use (brand new) begins with the taxpayer, (2) is eligible for MACRS depreciation, and (3) has an applicable recovery period of 20 years or less. The 30% first-year depreciation is claimed after the Section 179 deduction and before the calculation of regular depreciation. First-time breeding livestock can qualify for this depreciation.
• Constructive Receipt - Direct Payments of 2002 Farm Bill: The new farm bill allows participants to elect to receive up to 50% of the direct payments in advance for any of the 2003-2007 crop years. Thus this year participants have the right to elect to receive 50% of the direct payments in December for covered commodity crop that will be harvested in 2003. Unless Congress passes exempting legislation, the IRS will apply the "doctrine of constructive receipt" which will make the advance direct payments taxable in the year the payments COULD have been received, NOT the year of actual receipt.
• Converting Traditional IRA to Roth IRA: Depressed stock prices may present taxpayers an opportunity to convert traditional IRAs to Roth IRAs at reduced tax liability.
• IRA Contribution Limit is Increased: The IRA contribution limit is increased from $2,000 to $3,000 in 2002. For workers aged 50 and older, the contribution limit is increased to $3,500.
• Section 179 Deduction: Section 179 is an "old friend" used for making adjustments to taxable income and can also provide post year-end taxable income adjustment. This year the maximum deduction remains at $24,000 and will be increased to $25,000 for 2003.
• Prepaid Expenses - Financed by a Subsidiary of the Seller: Debate continues among tax professionals regarding the timing of the deductibility of purchases (corn seed, for example) financed by a subsidiary of the seller. The rulings are crystal clear that a cash-basis taxpayer cannot deduct the expense of supplies financed by the seller - until the financed amount is paid. Many tax professionals believe the IRS and tax courts will hold the seller and its financing subsidiary as "one and the same". Proceed down this path with caution until there is an IRS ruling or case law.
• Prepaid Expenses - Business Purpose: A 2001 U.S. Court of Appeals case involving a Missouri taxpayer revealed the importance of establishing the "business purpose" for the prepayment of expenses. If a valid business reason does not exist the IRS will conclude that tax avoidance was the primary reason and disallow the deduction for the prepayment. The court sided with the IRS in this case - concluding the business advantages alleged by the taxpayer either didn't exist or were attainable without the prepayments. Too frequently, prepayments resemble deposits rather than the advance purchase of specific supplies or the locking-in of a supply or price.
• Mid-Quarter Depreciation Convention: If more than 40% of MACRS assets are acquired during the last quarter of the tax year - all MACRS assets acquired during the year have to be depreciated using the mid-quarter convention instead of the half-year convention.
• Easier to Switch CCC Loans From Income to Loans: For tax years ending on or after December 31, 2001, the IRS has ruled taxpayers reporting CCC loans as income under Section 77 can switch automatically to treating CCC loans as loans.
• Saver's Tax Credit: Beginning in 2002 many taxpayers will be eligible for the new "saver's credit", an income tax credit based on elective contributions made to I.R.C. 401(k) plan, 403(b) annuity, or eligible deferred compensation arrangement of a state or local government 457 plan, SIMPLE, or SEP, contributions to a traditional or Roth IRA, and voluntary after-tax employee contributions to a qualified retirement plan. Depending on the level of adjusted gross income, the credit amount can be 10%, 20%, or 50% of the contribution to the retirement plan. An excellent explanation of and details on the credit can be found by clicking here.
• More Information on Farm Taxation: Tax forms, instructions, or publications can be ordered from the IRS by calling 1-800-829-3676 (1-800-TAX-FORM). Two very informative web sites to utilize are:
  • IRS Tax Tips - Agriculture: maintained by the IRS and
  • Ag Tax Tidbits which is maintained by Parman Green and the AgEBB staff.

(Author: Parman Green, Agriculture Business Specialist)

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