Conservation Expenses – Soil and water conservation expenses are similar to soil fertility expenses except, if the lessor is materially participating in the operation, the expenses may be deducted immediately; otherwise, they must be capitalized into the cost of the land. Other items such as income averaging and the exclusion of certain USDA payments may also only be available under livestock/cropshare leases, depending on whether the lessor is considered to be materially participating. Self-Employment Tax Self-employment tax may also be imposed when the lessor is materially participating in the lease. For passive rental activities, such as under a cash lease, rental payments are generally selfemployment-tax free. However, under livestock/crop-share leases, the lessor may or may not be materially participating in the operations depending on the requirements of the lease and the lessor’s activities. These leases must be structured properly to ensure self-employment tax is not imposed, especially if those rental payments are made from a related entity to the lessor in which an exception to the general rule may be triggered. Additionally, the leasing of farm and ranch equipment usually triggers self-employment tax for the rents received. However, through proper planning and structure, these rental payments may be able to be tied to the lease of farm or ranch land and not be subject to self-employment tax. Estate Tax If your client is likely to have estate tax issues at death, a landowner client may be able to utilize the special use valuation election at the time of the client’s death to reduce the value of certain qualifying farm or ranch real estate up to $1,310,000, depending on valuation methods used. Several requirements must be met to make the special-use valuation election, one of which is that the lessor must have materially participated in the operation in which the land was used for five of the last eight years before retirement, disability, or death. For this reason, it is important for advisors to closely analyze lease arrangements used by farm or ranch clients close to retirement or death. While this can reduce estate tax consequences, the necessary leasing arrangement may have the inverse effects related to self-employment tax and overall business objectives. Agricultural Program Payment The leasing arrangement used may also have effects on the lessor’s ability to receive certain USDA program payments. Among other limitations, an individual must be considered to be “actively engaged in farming” to be eligible to receive many USDA program benefits. Cash lease lessors are specifically treated as not being actively engaged, while lessors under livestock/crop-share leases may meet the actively engaged requirements if the rents received are tied to the actual production of the operation. The USDA payment limitation rules can be somewhat complex and must be navigated carefully to ensure the leasing structure chosen does not run afoul of these rules. Periodically reviewing current leasing structures and client objectives will help ensure your client maintains leasing arrangements best suited to achieve their objectives in a taxefficient manner. By taking a proactive approach, advisors can add value to the client’s business and reduce unforeseen consequences in the next phase of its life cycle. Nate Patterson is an attorney in the Estate, Business Succession, and Tax Department at Koley Jessen. Patterson works closely with each client and their team of advisors to implement estate, business succession, and wealth and tax planning to ensure each client accomplishes their personal and financial objectives and leaves a lasting legacy. With hands-on experience operating and managing a family farm, he also provides “boots on the ground” expertise to agriculture clients and family businesses on planning matters specific to the ag industry. He can be reached at nathan.patterson@koleyjessen.com. Nicholas Bjornson is an attorney in the Tax Department at Koley Jessen. His experience in dealing with tax issues and implementing business strategies provide members of the agricultural community efficient solutions to achieve optimal tax benefits and economic consequences. He also represents taxpayers in disputes with the Internal Revenue Service, the Nebraska Department of Revenue, and other state and local taxing authorities. He can be reached at nicholas.bjornson@koleyjessen.com. Periodically reviewing current leasing structures and client objectives will help ensure your client maintains leasing arrangements best suited to achieve their objectives in a tax-efficient manner. 13 www.nescpa.org
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