Monday, July 20, 2009
The Dairy Herd Buyout Has Tax Implications.
Dairymen who plan to participate in the buyout program, organized by Cooperatives Working Together, should consult with a tax advisor as part of the process and beware of the various tax liabilities that could result. Dairy herd liquidation is a life-changing event, and without consultation with your farm’s financial advisors, you may not control the changes as you intend.The dairy herd liquidation program is a cooperative effort with 70% of the US milk supply paying 10¢/cwt to help fund the program. Producers submit a bid per cwt of milk that would take them out of production, and their dairy herd moves to market. More than a quarter million head of dairy cows have previously been retired, taking out more than 5 billion pounds of annual milk production. The latest program is generally parallel to prior programs, but Philip Harris of University of Wisconsin’s Center for Dairy Profitability reports the payments to producers will have tax consequences that should be clear before going into the program.
Producers submit bids, based on hundredweights of milk, will be accepted by the CWT based on a formula that will minimize the cost of reducing production. The regional “safeguards,” which were designed to limit geographical impact, have been eliminated that all producers have the same opportunity for their bid to be accepted. If your bid is accepted, 90% of it is paid when your herd has gone to slaughter. Since 1987, the IRS has been treating the dairy herd retirement programs similarly, and looks to ensure the payments are less than the value of the cattle as milking dairy cows. That value is regularly reported by USDA in its “Agricultural Prices” bulletins. The gross sale price is reported on IRS form 4797.
The balance of 10%, including interest, is paid 12 months later if the producer has not engaged in any commercial dairy production and has not sold any milk commercially. Harris says there is some uncertainty about how the IRS will handle the 10% balance, since the prior program had a 5 year limitation on re-entering production, and this program only has a 12 month limit. He says, “The IRS could take the position that if the total of the CWT payments and the amount received from the
sale on the slaughter market exceed the “Agricultural Prices” value of the herd, then the excess (limited to the 10% deferred payment) must be reported on Schedule F (Form 1040) as ordinary income that is subject to self-employment income.” He suggests that if the 90% plus 10% remains below the USDA’s Agricultural Prices chart, then nothing would be reported on IRS form 1040 regarding ordinary income.
Another element is the program to eliminate bred heifers. They are treated equally in the program, but since they have not been held for the 24 month minimum required in Section 1231 of the IRS code, their sale is considered ordinary income, but not subject to self-employment tax. Harris says the proceeds from the sale of the livestock, plus the bid from the herd liquidation program may put the total beyond the Agricultural Prices quotation provided by USDA. Dairymen and their tax advisors have to decide whether the entire amount should be reported as ordinary income, or whether the payment should be excluded from that with the thought that selling the heifers did not require a 12 month hiatus in production.
Summary:
Dairy operators, who have suffered from low milk and high feed prices, are considering stepping out of the dairy business for the 12 months required by the dairy herd termination program. However, the prices received for selling their dairy cows, plus the payment received for liquidating their herd, may create tax complications. The incentive payments come in two installments and the second may result in additional IRS tax liability issues. The key is whether the total is more than what USDA reports as prices for the sale of dairy cattle.
Posted by Stu Ellis on 07/20 at 01:44 AM | Permalink