May 2008 was a good month for most farmers and members of the military - Congress overrode the President’s veto of its 2008 Farm Bill and passed much needed relief for military personnel. Both bills contained revenue increases to offset the tax relief provided to targeted groups.
The Food, Conservation and Energy Act of 2008 (Farm Act)
The Farm Act contains a number of measures favorable to farmers. Included in them is one that provides substantial relief to retired and disabled farmers. In 2006, the IRS announced its intention to include Conservation Reserve Payments (CRP) to disabled and retired farmers as self-employment income. This classification could have reduced disability and social security payments to these individuals. The Farm Bill overrides this decision and treats CRPs as rental income, effectively removing the payments from the self-employment income category. The rules apply for payments made after December 31, 2007.
Internal Revenue Code Section 1031 provides a mechanism to exchange like-kind property tax free. Thus, if a taxpayer has appreciated property that he or she no longer needs and wishes to exchange it for a different piece of property, the transaction can be structured to avoid recognition of a gain. The general rule, however, is that stocks and partnership interests don’t qualify as property under the 1031 rules. The Farm Bill will permit the exchange of water rights (as evidenced by mutual ditch, reservoir, and irrigation stock) to be tax-free under Section 1031. The new rules apply for transactions after May 22, 2008.
Farmers use a variety of dangerous chemicals in their operations. Manufacturers, retailers and distributors of these chemicals will now be eligible for a tax credit of 30% of eligible expenditures incurred to protect these products. The credit is subject to an annual maximum of $2 million and is treated as a general business credit.
Farmers who incur costs to achieve certain results under the Endangered Species Act of 1973 will now be eligible for a deduction of up to 25% of gross farming income in a tax year. This applies to expenditures made after December 31, 2008.
In a move reminiscent of the relief provided for Katrina victims, the Farm Act provides certain tax relief for individuals affected by a catastrophic tornado that hit Greensburg, Kansas in 2007.
Altogether, the tax relief provided by the Farm Act equals $1.7 billion. To pay for this relief, the Act reduces the current Ethanol Excise Tax Credit from $.51 per gallon to $.45 per gallon beginning in 2009. Additionally, the law limits the amount of farm losses that can be used to offset non-farming business income. In general, non-C corporation taxpayers who receive any direct or counter-cyclical payments under the Farm Act or Commodity Credit Corporation loans will be limited in the amount of non-farm business income that can be offset.
Heroes Earnings Assistance and Relief Tax Bill of 2008 (HEART)
Under prior law, approximately 8,000 to 10,000 members of the military would not have qualified to receive an economic stimulus payment because their spouse did not have a valid Social Security Number (foreign born spouses). HEART requires only one spouse on a joint return to have a valid Social Security Numbers if one is a member of the military. Additionally, an Adoption Taxpayer Identification Number will qualify as a valid Social Security Number for purposes of the stimulus payment relating to children.
In 2004, combat pay was added to the definition of earned income for purposes of the earned income credit, but the addition was only temporary. New law makes that designation permanent.
Perhaps one of the biggest boons for military families relates to the ability to access retirement funds. Under the Pension Protection Act of 2006, reservists called to active duty after September 11, 2001 could withdraw funds from retirement accounts penalty-free, but not income tax free. This helped reduce the burden of decreased income on the family. HEART makes this provision permanent. It also provides for penalty free access to flexible spending arrangement funds after May 22, 2008, regardless of the reason for the withdrawal.
Disabled veterans often retire from active duty and have to wait until the Veteran’s Administration designates a portion of their retirement pay as nontaxable disability pay. During the waiting period, the pay is treated as taxable income. Once a portion of the income is determined to be nontaxable, a veteran can file for a refund of tax paid on income for the prior three years. HEART removes this limitation and allows the veteran to get a refund for all taxes paid, regardless of year.
Small employers who pay differential pay (the difference between the employee’s regular and active duty earnings) will receive a temporary credit equal to 20% of amounts paid to employees up to $20,000 for each qualifying employee. Generally, a small employer is one that employs less than fifty employees.
HEART also provides other relief to military personnel and, if you have been called to active duty, you are encouraged to contact your tax advisor for further information.
As with the Farm Act, HEART includes revenue-raising measures to offset the tax relief provided. The measures generally relate to penalties for failure to file income tax returns and certain international taxation issues.
The Farm Act in particular was hard fought and controversial. Regardless of where you stood on its passage, it does provide relief for farmers who have been hit hard by rising fuel prices. Similarly, the nation’s reservists have shouldered a heavy burden in recent years. HEART recognizes this and gives some relief to those who protect our nation. If you fall into any of these categories, give us a call and let’s discuss whether the new tax laws can assist you.
Happy Independence Day!