Friday, February 23, 2007

This is why everybody should do their own taxes...

Item One: The "adjusted gross income" means test proposed by the administration:
To receive commodity payments, producers must also meet a limit on Adjusted Gross Income (AGI), which includes wages and other income minus farm expenses and depreciation. This plan reduces the AGI limit of $2.5 million to a new limit of $200,000. If a producer has an annual adjusted gross income of $200,000 or more, that individual would no longer be eligible for commodity payments. Internal Revenue Service (IRS) data for 2004 indicate that 97.7 percent of all American tax filers have an AGI under $200,000.
Item Two: A Congressperson reacts:
"Two hundred thousand dollars to the average guy is a lot of money," Chambliss said. "But what we in agriculture know is, $200,000 in adjusted gross income means once you get to that point, then you've got to pay for that $250,000 combine, that $100,000 tractor that you've got to have to operate your facilities."
Folks, these are two unrelated events.

Let's review briefly. Grasping your Form 1040, skim down to Line 37, labeled oddly, Adjusted Gross Income. Now notice that it includes all income (wages, farm income, capital gains - the whole pile) minus adjustments for health insurance, moving, and whatever else Congress thought was a good political move at some time.

The important thing for farmers is Schedule F income shown on your 1040 (line 18) is NET farm income, not gross. The gross income goes on line 11 of Schedule F. The cost of new combines and fertilizers and pickups has already been accounted for by the time the AGI is calculated. We call the machinery stuff Sen. Chambliss moans about "depreciation" (Sch. F, line 16). Perversely, those rules have been seductively generous for some time. (Which is why I am sooo doomed in 2008 when all mine runs out thanks to Section 179)

You don't have to love the proposal, but at least read the instructions.

9 comments:

Anonymous said...

Great explantion of the difference between AGI and gross farm income. As a farmer and accountant I was wondering when someone would call the Senator on this. Are these the intelligent people we elect to represent us? I feel ashamed as a farmer to have such an uninformed Senator.

brian said...

John,

As we discussed previously, the $200,000 AGI may still catch more people than many realize, especially given the price surge in commodities. One question - does spouse income count? For joint filers, it's lumped together on the 1040.
Given the current political and economic situation, what a fascinating time to have a farm bill debate!

Brian

Anonymous said...

Good points John but you are missing the big picture. In it's proposed form the AGI test rewards smaller, less efficient producers which is truly the farm welfare system you despise. Why be capitalistic if it's to your disadvantage? I met with my congressman last week to lobby against mean testing.

Anonymous said...

But they are related John. Since when has depreciation been equal to cash flow? My banker seems to want me to cash flow my combine payments over a much shorter span than it's depreciated lifetime (7 years). These payments have been seductively generous for years to stimulate economic growth in the communities where they are received. How many more acres of rented ground will I have to farm to make up for my "lost" payments to means testing? I don't know but the little guys will find out!

John Phipps said...

Whoa - I am ambivalent concerning means test, except as a way to make subsidies irrelevant. My point here is what the AGI really is.

I don't buy the argument that big producers are entitled to big subsidies if small producers get small subsidies. There is no logical reason for any subsidy, so attaching a means test to subsidize small producers does not have to be "rational".

And don't tell me that big producers deserve big money because they take bigger risks. The marginal cost curve should get steeper. There are risks to expanding - and profits. If you can't handle the risks of getting bigger then stay small and safe. Besides, if we were to ask taxpayers who they want subsidies going to it would not be guys like me or larger operators.

As for the spouse income, I haven't found any clarification about joint filers. Again, as I wrote in TP, this will be a fertile field for tax advisers , attorneys, etc.

John Phipps said...

One more time - Sen Chamblis is simply wrong. You don't pay for combines from your AGI - you pay for them from your gross farm income.

How fast you write that off for tax purposes is your business. If the loss of $25/A in fixed payments (my rough figure) "forces" you to crowd out smaller producers, then you why the heck didn't you expand before this?

Wait - I know, you were just showing restraint.

Look, the old argument that farmers expand to offset low prices (or lost subsidies) is just silly. If that were the case when prices rise we'd all cut back.

Cash rents have doubled (my crude calculation) in the last 6 months. IL - $190 to $380, ND $80 to $160.

Seems to me when prices rise, we expand. Not the other way round.

John Phipps said...

One more thought - do you really think machinery purchases fuel local economies?

Ask your dealer how much of that $300,000 he keeps from your combine deal. Sure it helps, but it pales compared to other dollar streams.

Combine money goes to Racine and Des Moines and New York City. (See JD stock price)

The money that sustains rural communities is Social Security and wages that are spent on rent, local health care, local services, local wages.

Wait - this needs to be a whole entry. See JWorld tomorrow.

Anonymous said...

Double Whoa- Subsidies are relevant. As long as they are in effect they need to be administered fairly (read porportionately). I don't have bigger risks per acre, I just have more acres. Simple.
Point #2. I did not understand the USDA proposed farm bill to just cut off direct payments (your $25 an acre figure) but ALL PROGRAM PAYMENTS if AGI exceeds $200,000. Wow, kinda mutes a revenue based program. BTW, I have been expanding for years thus my concern for the means test. It is silly to expand only in times of high prices as many more opportunities exist in leaner enviroments. See ya in Tampa.

John Phipps said...

This is what I dislike most about farm subsidies - you end up arguing which idea is less crazy.

As gross income per acre rises to the $800 mark, my DCP becomes less relevant - especially compared to the days of $400/A. Should some payment limit emerge from the debate large operators will absorb that loss and become policy-proof, IMHO.



The idea of farmers expanding production due to low prices to keep income steady is laughable, but widely held. Check Michael Pollan or Darryl Ray's agrarian views. My point was this idea necessarily implies that we cut back when things are good.

Again we are debating fallacies. If they don't give you a subsidy and they don't give me one, we'll still grow stuff.

Rents will be lower though.

As to fairness, only a sense of entitlement - not compensatory support - would argue for big aid to to big producers. I dispute that idea of unearned command of the public purse.