M E M O R AN D U M
TO: Reporters and Editors
RE: Reform Provisions in Senate Agriculture Tax Package
DA: April 21, 2008
For your information, below is additional information regarding reforms in the Senate agriculture tax package.
Reform Provisions in Senate Agriculture Tax Package
Schedule F Loss Limitation
The Schedule F Loss limitation in the Senate agriculture tax package was designed to specifically close the loophole that the Government Accountability Office reported in the April of 2004 Finance hearing (http://www.gao.gov/new.items/d04407.pdf).
At this time, there is no limit on how large a loss a farming operation can take. So, it’s simple accounting to artificially create losses in one entity (the farm entity that receives the Department of Agriculture payments) and then to offset the gains that they shift to other related entities.
The pyramids that Government Accountability Office (see page 23 of GAO report) documented were the classic where the farm was overcharged for related agricultural services and then underpaid for the crop, therefore creating artificial losses.
By doing this, it’s possible for these people to game the adjusted gross income limits (AGI) and also take huge tax savings with their losses. The Schedule F provision in the Senate agriculture tax package shuts that down.
Farmers and ranchers not receiving commodity payments or CCC loans are not impacted. Also, farmers and ranchers who only receive conservation program payments or milk program payments will not be impacted by this provision. This only applies to taxpayers receiving benefits under Subtitle A or B of Title 1 of the Food and Energy Security Act of 2007 in such taxable year, or Commodity Credit Corporation Loans in such taxable year.
CCC-1099 reports
The Department of Agriculture had taken the positions that CCC loans/generic certificates were actually a “barter” transaction. Because of that, they were outside of the reporting requirements. Treasury and IRS did not agree (much like the ongoing concern over the Conservation Reserve Program, USDA calls it rent, but IRS-Treasury and the courts says that it is a substitution for farming income and then therefore subject to self-employment tax).
The legislative language clarifies that the loans/certificates are subject to 1099 reporting.
In addition there was concern that people were taking the position that if they did not receive a 1099 then they did not have to report the income.
Fuel Fraud
Currently, foreign produced biodiesel can enter the U.S. without either being subject to the diesel fuel excise tax or being tested to ensure that it meets the fuel quality standards required under law to claim the biodiesel tax incentive. Under the Senate agriculture tax package, the fuel excise taxes will be collected on imported biodiesel, and only fuel that meets appropriate quality specifications will receive the biodiesel tax incentive.
This reform will also significantly inhibit abusive re-export schemes that serve no energy or tax policy purpose.
The Senate agriculture tax package changes the point at which biodiesel and diesel fuel blends are subject to the 24.4 cents per gallon diesel fuel excise tax, which will ensure that fuel used in on-road applications is properly taxed, and funds collected are properly credited to the Highway Trust Fund.
In addition, under the Renewable Fuels Standard, once ethanol production is certified to reach the 7.5 billion gallons of the standard, then the tax credit will be adjusted in January of the following year to reflect the maturing of the industry and achieving the goal. Also, the farm bill proposes an additional tax credit for the next generation of cellulosic alcohol fuels.
Optional Self-Employment Tax
A special provision for the self-employed, including farmers and ranchers, to help them qualify for Social Security benefits, hasn’t been updated in many years. As a result, these workers are sometimes unable to qualify for coverage.
The agriculture tax package updates this special provision to allow the self-employed to pay additional payroll taxes, so they can qualify for Social Security.