Tax Loss Planning for Farmer Purchasers

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On this article, we evaluate what can qualify for particular remedy as a farming loss and the scope of the particular Web Working Loss rule.

The “farming loss” phrase appears to the lesser of the NOL for such yr, or the NOL for such yr “if solely revenue and deductions attributable to farming companies” are taken into consideration (Sec. 172(b)(1)(B)(ii)).  

The “farming companies” phrase right here results in one other path – Part 263A(e)(4) – which, reverting again to the singular, tells us {that a} farming enterprise contains working a nursery or sod farm, or elevating or harvesting timber bearing fruit, nuts or different crops, or decorative timber.  That is useful element, however the statute additionally reverts to the generic. It tells us a farming enterprise “means the commerce or enterprise of farming.”

Seeking to the Part 263A rules for additional steering on what’s a “farming enterprise,” we discover references to sections 263A(d), 263A(e)’ and Regs. 1.263A-4 for “guidelines referring to taxpayers engaged in a farming enterprise” (Regs. 1.263A-1(a)(3)(v)).  One other portion of those rules refers to an exception for prices paid or incurred in sure farming companies, and right here once more we discover a reference to Regs. 1.263A-4 for “particular guidelines” referring to such taxpayers (Regs. 1.263A-1(b)(3)). 

Part 263A(d) tells us that Code provision isn’t to use to any animal, or plant with a pre-productive interval of two years or much less which is produced by a taxpayer in a farming enterprise (See Sec. 263A(e)’(4)). Regs. 1.263A-4 has “farming enterprise” in its title, and does get all the way down to particulars in (a)(5) in defining that time period, which we’ll now summarize.  It contains the next:

  • cultivation of land                                                                                                          
  • elevating or harvesting any agricultural or horticultural commodity
  • instance – commerce or enterprise of working a nursery or sod farm
  • instance – elevating, harvesting of timber with fruit, nuts or different crops
  • instance – elevating of decorative timber (apart from evergreens greater than six years previous when severed from their roots – so the tree’s birthday turns into tax related) elevating, shearing, feeding, caring for, coaching, and administration of animals (however coaching your pet within the again yard doesn’t make you a farmer).

“Elevating” an agricultural or horticultural commodity doesn’t embody shopping for and reselling vegetation or animals grown or raised completely by one other. “Elevating” contains when the plant or animal is held for additional cultivation and growth previous to sale. “Harvesting” as used above doesn’t embody contract harvesting of a commodity raised by one other. 

The rules go on so as to add such brushstrokes as “all of the details and circumstances,” and what’s an “incidental exercise.” The rules include many extra particulars. For instance, “sea vegetation” could also be farmed if they’re “tended and cultivated” however not so if they’re “merely harvested.” Scope of exercise questions are a difficulty right here. 

Tax planners must resolve whether or not the consumer is a farmer, or has a portion of their actions that represent a farm and hint such actions to the NOL, or a portion of the NOL.

Particular NOL Guidelines for Farmers

The literature on our matter makes for troublesome studying, partially due to a legislative oversight as to NOLs and the farmer, and a few particular NOL guidelines benefitting the farm.   The reader could bear in mind a no-carryback besides two-year-carryback rule for farm losses, and that rule  does seem to have survived.  Additionally understand that the passion loss rule will also be a difficulty in farming (Sec. 183).

There have been three regulation modifications which radically modified the NOL carryback idea:

  • Regulation change #1 – the Tax Cuts and Jobs Act enacted December, 2017;                       
  • Regulation change #2 – the Coronavirus Assist, Aid, and Financial Safety Act aka the CARES Act enacted March 2020; 
  • Regulation change #3 – the Covid-Associated Tax Aid Act (CTRA) of 2020 enacted in December 2020 (See Rev. Proc. 2021-14).

Regulation change #1 usually had the next affect:

(a) restricted a post-2017 NOL deduction to 80 % of taxable revenue

(b) eradicated the loss carryback

(c) absent waiving the carryback allowed post-2017 farm NOLs to be carried again two years topic to the 80 % rule

(d) allowed indefinite carryovers

Word that (c) appears to have initially been an indefinite go-forward rule benefitting farmers and that seems to have survived. We discover the 2021 directions to Schedule F telling farmers they will nonetheless get the two-year carryback to the extent the NOL displays farm losses.

Word that (d) refers to permitting indefinite carryovers for NOLs arising in tax years starting after 2017 whereas earlier NOLs nonetheless have a twenty-year carryover.

Regulation change #2 usually had the next affect:

(a) eradicated the 80 % rule as to NOLs, farm and non-farm, arising in 2018-2020

(b) did away with the two-year carryback of farm NOLs

(c) added a five-year carryback rule benefitting farmers and non-farmers for 2018-2020 (extra particularly, tax years starting after 2017 and earlier than 2021)

(d) farmers and non-farmers can waive the five-year carryback.

The NOL guidelines require the loss to go to the earliest yr first.  Taxpayers can not choose and select a yr within the carryback interval. When it eradicated the two-year carryback of farmer NOLs, regulation change #2 drafters didn’t actually give attention to what if the farmer already carried again two years.  

Regulation change #3 had the next affect:

(a) supplied an election saying the farmer can retain the two-year carryback election albeit topic to the 80 % rule within the carryback yr

(b) permits farmers who beforehand waived carryback to revoke that call.

See usually the reasons and fairly concerned particulars at to elections in Rev. Proc. 2021-14, I.R.B. 2021-229 (See additionally “IRS Gives Steering for Farming Loss NOLs,” Kristine Tidgrin, Ag Docket, Perspective on Agricultural Regulation and Taxation, Iowa State College, July 1, 2021;www.calt.iastate.edu).

As to 2021 and later, does the farmer nonetheless get the advantage of the 2-year carryback rule?  An IRS web site explaining 2021’s Schedule F for farmers says farmers get a 2-year carryback of an NOL arising in 2021.  

“An NOL can not be carried again to any tax yr, except the NOL is a farming loss.  To the extent the NOL is a farming loss, you possibly can carry again the NOL to every of the two tax years previous the tax yr of the loss” (“2021 Directions for Schedule F (2021),” www.irs.gov).

Going Ahead

NOL planning usually focuses on charge realization on losses, and realization on loss carrybacks versus carryovers conserving in thoughts potential modifications in tax charges. Planning for farm losses has distinctive near-term concerns and elections underneath Rev. Proc. 2021-14.

Loss planning usually appears extra necessary than ever as we’ve entered this new 2021 period of loss carryovers. The deduction atmosphere is mostly extra restrictive. 

A comparatively new consideration is the surplus loss limitation which might translate into enterprise losses being added to the NOL carryover fairly than yielding present profit (Sec. 461(l); see additionally part 461(j) which might impose restrictions on farm losses).

On this creator’s view, we’re getting into into a brand new legislative atmosphere that may unfairly, severely restrict the taxpayer’s potential to mitigate the generally harsh outcomes of our annual accounting idea.  

We’re a brand new 2021 atmosphere during which a taxpayer could make one million on December thirty first, lose it January 1st, break-even over two days, and owe tax on one million. You can additionally venture a big NOL carryover expiring on the taxpayer’s dying, and having to elucidate this situation to the executor and IRS collections employees (See “Web Working Loss Carryback Repeal Isn’t Getting the Consideration It Deserves,” Rojas and Pusey, rojascpa.com, 4/22/17).

Whereas there’s now an infinite NOL carryover, the brand new normal rule in 2021 can also be one in all no carrybacks, a minimum of for non-farming losses, which might have extreme antagonistic results. 

As famous above, farmers nonetheless seem to get their very own fairly distinctive mitigation of the annual accounting idea within the type of two-year carrybacks even in 2021 and going ahead.

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