Susan Voss, CPA, one of the leaders of TD&T’s Ag team, discusses the current Ag market and our economy. Along with an update on our status, she also provides some critical information regarding leases and how it could relate to your taxes.
In previous newsletters, I have focused on how we can make it through a soft market and still thrive. As I have been reading various news articles in farm publications and elsewhere, I keep getting the message that we may have to hang in there for another year or two before the trend lines start to climb again. Then I came across a couple of articles about farm and rural economy written by David Peters, associate professor and extension rural sociologist with Iowa State University. He has summarized our current Iowa farm economy status and supported his observations with graphs and statistics. You can find his full reports at https://store.extension.iastate.edu/Product/14898.

Where Do We Stand?

In his study, “Income Trends for Iowa Farms and Farm Families 2003-2015,” David Peters explains two ways to look at the farm economy. The USDA defines farms based on gross cash farm income (GCFI):

  • Commercial farms have $350,000 or more
    • Mid-sized farms: $350,000-$999,999
    • Large farms: $1-5 million
    • Very Large Farms: Over $5 million
  • Intermediate farms have less than $350,000 in GCFI and provide the operator’s primary income
  • Residence farms also have less than $350,000 in GCFI for operators who get most of their income from somewhere else

In Iowa, commercial farms operate two-thirds of the farm acreage, but represent only about 24% of total farms. Intermediate farms make up about 30% of farms, but only account for 11.8% of the acreage. Residence farms represent 46% of all farms and account for only 8.3% of sales.

The second way to examine farm economy is to look at net farm income. Here’s how they broke out:

  • Residence farms had high household incomes, averaging $115,941 in 2015. These families obtained more than 80% of their income from non-farm sources.
  • Intermediate farms earned an average of $83,138, but only about two thirds of that came from the farm. These families also saw their income rise significantly in 2013 and 2014, only to decline slightly in 2015.
  • Mid-sized farm households brought in $250,562 in 2015, but almost half of that income came from off-farm sources.

It’s clear, in order to maintain a good standard of living, Iowa farmers have to rely on some outside income in addition to their farm income.

Farmers Outperform Urban Families in Iowa:

  • Are wealthier than urban Iowans
  • Are wealthier than other rural families nationally
  • Have seen their income grow faster than those in urban areas
  • Overall have experienced faster growth rates than the national average

In 2015, rural Iowans experienced a median income of $60,223, while those in urban Iowa had a median income of $51,705. This trend has continued over the last ten years. The study concluded that rural Iowa’s economic strength stems from:

  • Commercial farms, which benefit from Iowa’s good soil and temperate climate, plus other factors that match the needs of farms.
  • Residential farms – which permit those living in rural areas to have the best of both worlds – a foot in agriculture and higher income from jobs in the cities.
  • Rural commuting – permitting people to live in rural areas while working in one of the many smaller cities scattered across our state.
  • Migration to the cities – many people with lower incomes and skill levels have moved to urban areas.
  • Age – the average age of rural areas is higher than in urban areas. Typically experience and higher income often come with age.

So, Am I Saying We Should Count Our Blessings?

In a word, always. Those of us who rely on agriculture for some or all of our livelihood not only make a significant contribution by helping to feed people here and abroad. We also enjoy the opportunity to operate fairly independently on our own land, in many cases the same land our grandparents and great-grandparents farmed for generations. When I look out over the land our family farms, like you, I feel a connection to this place in a way that I doubt others who have never done this can fully understand.

Tax Season Coming – Make Sure Your Lease is Really a Lease

A tighter farm economy has also required our suppliers to get creative in their selling strategies. Equipment dealers have come up with a broad array of contractual arrangements to make it easier for producers to upgrade their equipment. Some dealers have offered deals they are calling a “lease.” You need to know what the IRS considers a lease before you enter into one of these agreements, thinking you may benefit from a lease over a purchase.

In simple terms, a true lease, also called an operating lease, involves paying for the use of equipment and nothing beyond that. Dealers also use a “capital lease,” in which the producer essentially pays for the equipment over time. According to Kristine A. Tidgren at the Iowa State University Extension, the IRS rules state that if your “lease” agreement includes any of the following, it’s not a lease for tax purposes:

  • The agreement designates part of each payment towards an equity interest that the farmer will receive in the property.
  • The farmer gets title to the property after paying a stated amount of “rental” payments required under the agreement.
  • The amount the farmer must pay to use the property for a short time is an inordinately large part of the amount he or she would pay to get title to the property.
  • The farmer pays much more than the current fair rental value for the property.
  • The farmer has an option to buy the property at a nominal price compared to the value of the property when that option is exercised.
  • The farmer has an option to buy the property for a small amount compared to the total amount paid under the agreement.
  • The agreement designates some part of the payments as interest, or parts of the payments are easy to recognize as interest.

How Trade-Ins Affect the Lease

If you trade in a piece of equipment, such as a tractor, and you are replacing it under a lease agreement, the nature of that agreement will affect how your trade-in applies for tax purposes. The effect of the trade will differ if you have a capital lease compared to an operating lease. Before you finalize a decision, give TD&T a call and let us help you understand the consequences of one approach compared to the other, as it relates to your specific situation. You can also find out more about this topic in Kristine’s article at https://www.calt.iastate.edu/blogpost/make-sure-you-understand-tax-implications-equipment-“trade.”

Closing Thoughts

In closing, if you haven’t been thanked in a while for producing your products that feed the world, no matter what your farm size is, commercial, intermediate, or a residence farm: Thank you. Statistics are always interesting and sometimes surprising. Blessed? Always. Also, if you’re considering a lease, please beware. The dealers are needing to move new and used inventory and they seem to be getting imaginative to do it. Please call your tax professional if you have any questions. Sometimes what’s too good to be true…..well, you know the rest of that story.