How to handle unique income (like COVID-19 relief) and leverage health expenses to save on your 2020 farm income taxes | The Spokesman Speaks Podcast, Episode 56
Welcome to Episode 56 of The Spokesman Speaks podcast.
In this episode, Kristine Tidgren (Director of the Center for Agricultural Law and Taxation at Iowa State University) helps farmers make the most informed choices when filing their 2020 income taxes. From COVID-19 relief payments and programs to crop insurance claims resulting from the derecho, farmers have experienced a wide range of unusual things that they'll need to account for when filing their taxes in 2020.
Also, Terry Harrington (president of BASE) shares a way for farmers to leverage their health care expenses to save significantly on their income taxes.
Listen to The Spokesman Speaks Podcast in your favorite podcast app
Resources referred to in this episode:
- Iowa's 2020 Farm Income Tax Webinar
- Leveraging your health care expenses to save on your income taxes, through BASE
- Farmers Vote - voting resources from Iowa Farm Bureau
- Click here to view the transcript +
Narrator: Welcome to the Spokesman Speaks a podcast from Iowa's leading agricultural news source brought to you by the Iowa Farm Bureau. Now here's your host.
Dirck Steimel: Welcome to the October 19th edition of the Spokesman Speaks podcast. I'm Andrew Wheeler and today's episode includes key updates and tips that will help you make the most informed choices when filing your farm income taxes. This year from COVID-19 relief payments and programs to crop insurance claims resulting from the derecho farmers have experienced a wide range of unusual things in 2020 that they'll need to account for when filing their taxes. It's a bit complicated, but we've got an expert to walk you through it. Kristine Tidgren who's the director of the Center for Agricultural Law and Taxation at Iowa State University. Spokesman editor Dirck Stiemel has the story.
Dirck Steimel: We're here with Kristine Tidgren director of the Iowa State Center for Agricultural Law and Taxation to talk about tax issues that farmers should be aware of as they get ready to prepare their 2020 returns. Kristine, what are some of the key tax issues that farmers need to be aware of as they finish out 2020 and begin tax planning?
Kristine Tidgren: Well, it's been a very unusual year this year to say the least and given all of the relief that has come in because of COVID-19 given the interesting government payments we've received CFAP 1, CFAP 2. All of the different, unusual type of payments along with crop insurance for a lot of our farmers because of the duration or the drought. There are a lot of things that farmers need to do to consider whether they're going to have higher income than usual lower income than usual. The timing of the income that they usually receive may be thrown off a bit because the government payments are coming in this year for crops that maybe would have normally been sold next year. So there's just a lot to consider a lot of provisions that were put in place with the Cares Act that impact farmers tax planning. So I would just advise farmers to really take extra look this year at their income at their expenses and work with their advisors to sort of come up with the best plan they can for income taxes for next year.
Dirck Steimel: Speaking of those government programs, how will CFAP 1 and CFAP 2 payments be taxed. And what about the last MFP and arc PLC payments?
Kristine Tidgren: Well, the payments that farmers are receiving through CFAP are just going to be considered ordinary income subject to self-employment tax, just like any other farm income. So they are handled like typical arc or PLC payments. They come in on a 1099 and the farmer will report them as income on their Schedule F and so there's no option to defer that income to next year. So whatever the farmer received from any of those program payments, they, if they are cash accounting, which most of our farmers are, they have to recognize that income in 2020,
Dirck Steimel: Another source of income for farmers has been crop insurance and disaster payments. How will those be handled in their tax forms?
Kristine Tidgren: Well, as many of your listeners know, crop insurance has a little more flexibility in terms of how we handle the taxation of it. We have an option in the tax code, which allows us to defer recognition of that income. If we typically would have sold the crop for which we're being paid in the following year. So the idea of that provision in the code is to help farmers avoid that income bunching. So let's say, typically I would have sold my 2020 crop in 2021 and recognize the income from that the following year. The crop insurance provisions say in that case, any crop insurance payments that you receive in 2020, you can opt to defer those to 2021, just so that you all of a sudden not doubling up on income that you don't normally receive in this in the same year.
Dirck Steimel: How will an economic impact payment affect farmers income and taxes in 2020?
Kristine Tidgren: Well, these economic impact payments were interesting. They started coming in May and remember these were those payments that were made to individuals and they came out as $1,200 per person, $2,400 for married couples, $500 for children under 17. So some of these payments were fairly significant. And the great thing about these economic impact payments is the law says that they are not included in your gross income. So the good news is that you don't have to recognize those payments as income. And those will actually be reconciled when you file your 2020 return. They were considered a tax credit and the payment that was made was an advanced payment of that credit. And another good part about the way the law was written is if somehow when you're reconciling the payment you received with the payment, for which you were eligible in 2020, if it looks like the government paid you more than you should have received, because the government looked at 2019 income and 2019 ages of children and things, the law says you will not have to pay any excess back. So that's good news, but everyone should be aware that on the 2020 return, there will be new fields and things that will have to be filled out to reconcile those economic impact payments.
Dirck Steimel: A number of farmers received Syngenta Settlement Payments in 2020. How should those be reported?
Kristine Tidgren: Yeah, the Syngenta payments are interesting too, if you remember, this goes way back, right? Five years or so that these lawsuits were filed against Syngenta for the fact that Syngenta sold some genetically modified seed corn. China rejected the import of that corn and the lawsuits alleged that Syngenta was responsible for the decline in corn prices. And so these lawsuits proceeded, they were large class actions and eventually Syngenta settled. And it's, it's almost hard to remember all the details because it was so long ago, but it was just this year that farmers started getting payments from those settlements. So a number of listeners received one check already, and then the second check, the second part of that payment is being made shortly. Sometime at least they're saying by the end of the year. And so, any of those payments that you receive in settlement of the Syngenta lawsuit are also going to be income, subject to self-employment tax. It's just considered income, that replaces farm income that you would have received for the years that the lawsuit was initiated.
Dirck Steimel: Kristine, are there any special considerations for those who are impacted by the derecho? Kristine Tidgren: There are dark. The storm had terrible impact on a number of farmers. Destroyed a lot of outbuildings destroyed a lot of crops. So as far as the crop damage that should be handled through crop insurance disaster payments that are made are also considered like crop insurance, if it affects crops. So any of those payments you know, can be deferred as we talked about, if it was a typical practice of the farmer to sell that corn or those soy soybeans next year, instead of this year. But in terms of the destruction of grain bins, the destruction of outbuildings, there are special provisions in the tax code that I would advise farmers to work with their tax professionals to look at, whether they'll have a casualty loss, how long they have to replace those buildings and not have to pay tax on any recognition of gain that happens because of the destruction of those buildings sounds counterintuitive, right? But if you receive an insurance payment for a building that was destroyed, you may actually have gain, you can take that gain and you can roll it forward into a new building and not have to pay any taxes on that. And you have a certain number of years to do that, but you just need to work with tax advisors to make sure that that you're following those rules, just so you don't have any unexpected gain that you have to pay tax on for something that was actually a casualty.
Dirck Steimel: 2020 was obviously an unusual year. And we had new programs like PPP and EIDL if a farmer received a PPP loan or an EIDL advance, how will that affect their 2020 return? And when should they apply for forgiveness for those loans?
Kristine Tidgren: Yes. This has been a big question because PPP was very popular. A number of farmers did receive PPP loans. A number of farmers also received EIDL advances, which were a thousand dollar payments per employee. And those are handled differently under the tax code. If they received a PPP loan, it is a loan right now. And once they apply and receive forgive, apply for and receive forgiveness, then what the law says is that those proceeds will be forgiven and they will not be recognized as gross income. Now, one issue we've had is that IRS has said that any expenses that someone has paid with that PPP loan will not be deductible. If it is ultimately forgiven. Now that has caused some concern because if your expenses aren't deductible, then essentially it negates the fact that it was excluded from gross income. So Congress has said that really wasn't our intent. We intended it to be excluded from gross income. We intended for those expenses to be deductible, but that's something that has to be worked out. And we're really hoping that Congress will pass a law that clarifies that. But in the meantime, there's no rush to go out there and apply for forgiveness. We have a lot of time to do that. The window doesn't close until 10 months have passed from the end of the covered period, which in most cases is 24 weeks. So, so you have the covered period is 24 weeks after the time you received your loan proceeds and then 10 months from that date. So you have 24 weeks after he received your loan proceeds. Then you have 10 months that before you would have to start making loan payments. So we have a fairly, a long window within which to apply for forgiveness. And I think no one is advising anyone to rush into that process. I would, I would tell farmers who received these loans to work with their lenders and see when they advise them to start applying for forgiveness, because there's still also a chance that we might receive a simplified form that doesn't require so much effort to fill out. So again, I would just sort of hold tight and also we're kind of hoping that we'll receive new law, which would mean that you wouldn't have to worry about the expenses problem. So there's still kind of an open question on that with respect to the EIDL advance, the $1,000 grant that you received is taxable, but if you received both the PPP loan and an EIDL advance, then the PPP forgiveness is reduced by the amount of that EIDL advance. So again, just some technical details that if farmers have questions about they should consult with their tax advisor but there are still some ambiguities with respect to how those will be handled.
Dirck Steimel: Kristine, are there any other COVID-19 provisions that farmers should consider when working on their 2020 taxes?
Kristine Tidgren: Well, there have been a number of changes made by the Cares Act, which was the primary vehicle to get relief into the hands of Americans who are impacted by COVID-19. So we've had provisions like the Family's First Coronavirus Response Act, which was the act that required all employers under 500 employees to pay sick leave and family leave to their employees. If farmers have employees they were required to comply with that law as well. But the good part about that is if you paid, paid leave or sick leave to employees who are impacted by COVID, either because they had COVID themselves, or because they had to stay home with sick children or children who just were not able to go to school because of quarantine, then there is a tax credit that is available to be claimed to compensate for the costs of those payments that were made to employees. So for farmers who have employees, that's a benefit, there's also an employee retention credit that was out there that some farmers were able to take advantage of. There are new rules with respect to net operating losses. I would advise if any of your listeners had a net operating loss in the last couple of years, that they should consult with their tax advisor to see if there are options now to go back even further and perhaps get a refund for that loss, because the rules changed now in the farming world, we always advise farmers to avoid net operating losses if at all possible. But if not, if they weren't able to do that in 2018, 2019, there are new rules that they should look at that could help them. Also, there were retirement changes with respect to required, minimum distributions, and some of those things that impact retirement accounts. So there were no required minimum distributions this year. So for those listeners who are over 70 and a half and now with the secure act 72 or older, who would typically have to take out a required minimum distribution, those did not have to be withdrawn this year. So those are not required to be in income this year for those folks.
Dirck Steimel: Finally Kristine, are there any tax strategies that farmers should consider yet this year that may benefit them in their tax filings in 2020?
Kristine Tidgren: Well, Dirck, I really do think this is a year to have a pretty thorough meeting with a tax advisor to really look at what your income is going to be in 2020, because even though it was a year impacted by low prices by difficult circumstances that the government payments that were made to compensate farmers for those losses may in some cases, cause income in 2020 to be higher than usual, because perhaps some of that income wouldn't typically have been recognized in 2020, but would have been recognized in 2021. So, you know, depending on circumstances, it's kind of typical end of year planning in terms of a farmer needs to look at where their income's at and you need to try to find that sweet spot. And the good thing about agricultural taxation is we have a lot of tools to sort of help get us where we need to be for a particular year. So we're not either paying too many taxes or we're not having a loss because losses don't help us. Right. We really want to get to that sweet spot where we have some self-employment income. We want to protect our future retirement, our feature ability to take, you know, to receive disability income, that type of thing. But we don't want to overpay on taxes this year if next year income would be lower. So the goal is to even out income, right? With things like considering whether you prepay expenses, whether you have deferred payment contracts for your grain, whether you elect out of a deferred payment contract that you have. So it's about whether you want to recognize additional income or whether you want to find extra to offset income that you have. So it's sort of that typical end of the year exercise that we always have. But this year we just have a couple of additional payments that we don't typically have that we have to factor.
Narrator: Well, no one said it was simple, but I think that Kristine has given us some good things to keep in mind as you start meeting with your tax advisors. If you'd like to hear even more from Kristine or ask some questions that are specific to your farm situation, I encourage you to tune in for Iowa Farm Bureau's annual Farm Income Tax Webinar on November 5th. We've included a registration link for that free webinar and the notes for this podcast episode. So you can click there to get registered. Okay, I'm going to go out on a limb here and say that none of you like paying taxes and of course, no one is a fan of paying for healthcare expenses either. But what if there was a way for your healthcare expenses to help you save thousands of dollars on your taxes? You'd probably like that, right? Next up, we have Terry Harrington, who is the president of Base in Adel. Base is a company that helps farmers and other business owners save money on their taxes. Through IRS approved plans. Base is also a Farm Bureau partner of choice, which means that Farm Bureau members receive a discount on Base plans. That's something to keep in mind as you listen to Terry and think about how you can keep more money in your pocket. This tax season Spokesman reporter Corey Munson has the story about base and the deductions they can help farmers and small business owners discover through section 105 of the tax code.
Corey Munson: Thank you, Terry, for joining us now, specifically today, we want to discuss health reimbursement arrangements or HRAs. Can you start by filling us in on what exactly section 105 of the tax code says and how HRAs work?
Terry Harrington: Yes. You know core section 105 has been part of the tax code since 1954. So it's been around and tested for a long, long time. It was granted a safe Harbor when the Affordable Care Act started back a few years ago and has been enhanced in many ways over the last few years. But section 105 in and of itself really allows for the deductibility of insurance premiums and out of pocket expenses can be tied to it also for employee of a small business owner in my mind. And I don't want to say that I know for sure why this law was passed, but I honestly believe it was designed to help the small employer get on the same field as the large corporations in the United States today, because this allows the business owner, the employer to provide healthcare and reimbursement of those healthcare and out of pocket expenses for their employees. When the employer does that, it becomes 100% tax deductible as a business expense for the employer and the benefits that the employee receives from the employer are 100% tax free to the employee also. So it, again, it really allows that small business owner, maybe it's a, what we call a mom and pop shop family farm, a flower shop, a small trucking business or folks with more employees again, to be able to provide benefits for their employees in a very, very favorable way for everyone. Can you go in a little deeper on that and just tell us why would a member want to establish this type of plan? Well, today, if I'm a self-employed individual and let's just take a small business maybe a family business, husband and wife, if I'm providing your purchasing healthcare today for my family, I can deduct that on my personal side of my taxes. And while that's a good deduction to have, if I can take it as a business expense, it opens up so many more opportunities for tax savings. So what we want to be able to do and what we see with an awful lot of our Farm Bureau members quite frankly, is if they have a spouse who is working in that ag business, they can create an employee relationship. So for example, I may look at my wife and say, you know, we've been working together for years in this family business. We both get up in the morning. That's the focus of our day. And we're providing health care for our store ourselves and for our family, we're only able to deduct it minorly on the 1040 on my taxes. But if I look to my wife or my spouse, I shouldn't say and say, Hey, let's have an employer and employee relationship. So I hire my wife as an employee and because she's an employee, now I can utilize the benefits of section 105 of the internal revenue code. I can provide health insurance to my employee, even if my employee is my spouse, I can also extend those benefits to my employees, dependent children and to my employee's spouse, who happens to be me. So that same healthcare plan that I have today for my family and now become a business expense. And as soon as I do that, all of my premiums for that healthcare expense, including maybe any out of pocket expenses I have for deductibles and copays or vision insurance and expenses for dental, all of those expenses become a business expense. So now I'm able to deduct those from my federal income tax, my state income tax, and myself employment tax. So we look today at a typical member who is utilizing the section 105 health reimbursement arrangement. Their tax savings is it is on an average $5,000 or a little bit over. So it's a huge benefit for small business owners and larger business owners as well.
Corey Munson: Based on those numbers, it really seems like a smart move for a lot of members. Within the plan, what can be reimbursed?
Terry Harrington: Well, a person can reimbursed typically their healthcare premiums, their deductibles, their copays, they can deduct their vision care, whether it's a direct payment to an insurance company for vision insurance or out-of-pocket vision care. Same thing with dental, Medicare expenses part D. Long term care premiums that's one that I should really bring up. This is the only way that an individual can deduct long term care at 100% as a business expense. So typically today, if Cory, if you or I were to purchase long term care, we would be able to deduct it on a sliding scale based upon our age and the older we are, the more of that premium we could deduct, but there is a limit, but if we do it through a section 105 plan, I can deduct 100% of my premium for my spouse and for myself under the plan, therefore my long term care premium, I get to save that on my federal income tax, my state income tax and myself employment tax. It's a huge opportunity for those who are purchasing long term care.
Corey Munson: Many might be wondering then why haven't they heard of this plan before? And really what's the best way to get started with it?
Terry Harrington: That's a question. We get an awful lot. Why haven't I heard about it? Why hasn't my insurance agent visited with me about it? Why hasn't my tax preparer visited with me about it? And I don't think we want to throw any stones at anyone. If we think back at it a little bit, you know, this law has been around the core of this law has been around since 1954, as I mentioned earlier. And even in the mid-nineties, when we started using it, I started using with my clients, you know, it almost sounded too good to be true. And you know, our parents taught us that it sounds too good to be true. It probably is. And stay away from it. Well, that's far from the truth in this case. So I think back in the fifties, the sixties, the seventies, the eighties, and the early nineties, even. You know, healthcare expenses weren't as high as they are today. So people just didn't pay any attention to it. But today with the high cost of healthcare, I think it's becoming much, much more prevalent. You know, we probably have a 30,000 small business owners using it just with our organization today. And then the other part of it is these plans have changed so much since the Affordable Care Act came into law. So for example, when we started this company back in 1999, we have one plan and one plan only the section 105 health reimbursement arrangement today, there are five total health reimbursement arrangements that work for a myriad of different reasons or opportunities I should say, with different business structures and whatever. The last one that just came into effect was done by executive order last fall. It was effective January one. And I we've seen a big uptake in it in the last few months, but we didn't see a much of a take on it in the first part of the year. I think a lot of it was because of COVID, which has affected an awful lot of things this year. I just think the information didn't get out, but what we're seeing now is a lot more interest in that, and it can work with different businesses and employees. So I really think it's just a situation now that these things become much, much more prevalent. And today, if I'm a self-employed individual or employer, whether I have lots of employees or I have one or two, or maybe just my family employee, we need to take the time to look into the various operations, because there are so many different benefits that can work in a different circumstances. There should never be a time and I hate to use the word never, but there should never be a time that someone is purchasing health care that they can't figure out some way to be able to take advantage of and utilize the tax code, it's there for a reason, but I've always looked at it this way. If I can save two, three, four, $5,000 and I have that opportunity, then that's my decision to make. So do I want to send that money to uncle Sam and let him use it, or her use that in my government, my state side, do I want to let them make those decisions, how to spend my money or do I want to keep it in my checkbook and spend it on my business or on my family? So I think there's a lot of reasons the information didn't get out, but I think it's an opportunity today. Farm Bureau was doing a great job trying to promote these types of programs with our members. And it really is. The member has to take the first step. Typically the best place to start is going to be your health insurance agent and as a Farm Bureau member, the absolute best places to start with your Farm Bureau insurance agent, you know, they have had some classes on this and some information on these programs over the years. So they should be able to give you a good foundation. A secondary spot of course is to contact your tax preparer. We do an awful lot of work with tax repairs across the state of Iowa and around the country. And I think today we probably work with somewhere a little bit South of 500 different accounting offices here in the state of Iowa. So they should be well aware of these programs also and give you some, some basic information that they can always pick up the phone and give us a call at +1 866-550-5525. That's a dedicated line for Farm Bureau members here on the state of Iowa. They can look us up at www.baseonline.com and take 10 minutes, figure out if you qualify, or if you don't qualify to take advantage of the opportunities that are there. The tax code gives us lots of opportunities. If we take advantage of it, this is just one of those that we really need to take a look at.
Dirck Steimel: Sounds like something to look into, right? If you're a farmer or a small business owner, I think you probably owe it to yourself to at least kick the tires and see if Base makes sense for your situation. And while you're doing that, remember that Farm Bureau members receive a discount on base services. You can learn all about that benefit by clicking on the link we put in the notes for this podcast episode, or by reaching out to your Farm Bureau insurance agent. Okay. Before we wrap up this podcast episode, I want to give you one more thing to consider a way to help ensure your voice is heard during the 2020 election. If you head out to IowaFarmBureau.com/farmersvote, you'll find answers to all of your various voting questions. From how and where to vote on or before November 3rd, to what kind of ID you'll need to bring with you again, it's IowaFarmBureau.com/farmersvote to learn all of the basics you need to know to vote in 2020. That wraps up another packed episode of the Spokesman Speaks. I hope that you discovered a few useful tips in this episode and that you'll join us again for our next episode on November 2nd, until then I hope you have a safe and productive harvest. Thanks for doing the work that we all depend upon. And thanks for listening to the Spokesman Speaks.
Narrator: Thank you for listening to the Spokesman Speaks a podcast by Iowa Farm Bureau. Check out more podcasts and articles from the Spokesman at iowafarmbureau.com/Spokesman. You can also find and subscribe to the Spokesman Speaks Podcast in the Apple podcasts, Google play, and other popular podcast apps. We appreciate your ratings and reviews and welcome your feedback at firstname.lastname@example.org.
About The Spokesman Speaks Podcast
Since 1934, The Iowa Farm Bureau Spokesman has been Iowa’s leading agriculture news source, and today it is the largest circulation ag newspaper in Iowa. While the Spokesman newspaper is available exclusively to Iowa Farm Bureau members, The Spokesman Speaks podcast is available publicly, reaching farmers on-the-go with stories and expert advice that matter. You can find episodes of the podcast here or subscribe and listen in your favorite podcast app, such as Apple Podcasts, Google Play, Spotify, iHeartRadio, Stitcher, TuneInRadio, or Radio.com.
Want more news on this topic? Farm Bureau members may subscribe for a free email news service, featuring the farm and rural topics that interest them most!