Don’t Sleep on These 2025 Farm Income Tax Tips
It might surprise you that there is one step even some seasoned farm income tax filers need reminding of, namely: When preparing your 2025 tax return, make certain you’ve counted all your income in addition to all expenses. Sounds obvious? Read on. In our experience, it’s not difficult for a farmer to remember reporting expenses, since they can reduce income tax liability. People will make an extra effort to search for farm and other business costs they’ve paid since last January 1, to receive the fullest deduction they can claim. But a common error our attorneys have seen over the years is that one or more sources of income were left out of a submitted tax return. Maybe it’s an oversight and not intentional. People make mistakes, and the IRS does have forms for amended returns, and to extend the deadline to file a tax return. The problem with this oversight is if you sign and submit a return that doesn’t include all reportable income, even if you later voluntarily file an amended return, the burden may fall on you to prove you weren’t committing tax fraud. The IRS takes its collections very seriously and may label what you would call an “error” as fraud. For this reason, even if a professional is helping prepare your return this year: Gains – or not – on grains While there are a few types of accounting methods individuals and businesses use to track finances, by far the most common for everyday taxpayers and farmers is cash basis accounting. With few exceptions, income is reportable when salary or payment is received, and expenses, when they are paid. Another method is accrual basis, mostly used by large corporations that are barred from using cash accounting. Under accrual, timing on when to report income and expenses differs from cash basis—one example is that grain from an accrual farm may be taxable inventory as soon as it’s harvested, but for a cash farm, there’s no income until the farmer is paid. If you are using cash basis to keep your books and file taxes, carrying over unsold stored crop into 2026 simply means you’re deferring that income to this tax year instead. It’s only income when you sell it. If you are using accrual, there are tax implications to discuss with your accountant or preparer. Carrying over corn or soybean inventory does impact a cash farmer in other ways: Although a lot of farmers have seen less income, there are some who harvested enough to pay their debts and still have grain in the bin. If they want to benefit a particular charity and empty the bin, they can donate grain directly to their beneficiary of choice. Note: This is not selling the grain and then donating the money for a deduction; it is donating the grain directly, and the elevator or other trustee sells it and disburses the payment to the charity. By doing this, a farmer can still claim eligible input costs for producing that grain but does not pay income taxes on its sale. The disclaimer on this, of course, is that the gift must be made in the reportable tax year—now is too late for 2025, but it’s something to think about before the end of 2026, if you are in this situation. Talk with your tax preparer for details. (319) 363-1641 Notable “et ceteras” In 2017, Congress’s Tax Cuts and Jobs Act made some changes to how equipment trade-ins are reported on income taxes, beginning with the 2018 tax year. Although this is several years old, there are frugal farmers who have not traded in equipment since then, who may have recently done so (or are considering it) and are unaware of these changes. Before 2018, if you traded in fully depreciated used equipment, any trade-in value you received would be applied as your down payment, and the “boot,” on the new item would be the tax basis for the newly acquired piece of equipment. Since 2018, in this same scenario, you are required to report the trade-in value like a cash receipt treated as income—but you can also report the entire new purchase value as the tax basis for the newly acquired equipment, which can then be utilized for a Section 179 deduction. This income can have an effect on income used to determine the cost of Medicare Insurance premiums, so talk with your tax preparer to understand those impacts. This advice is also applicable to everything in this article, so be sure to hire a knowledgeable tax professional who understands farm finances. Another consideration for some farmers is an upcoming change in the alternative minimum tax. The AMT was enacted decades ago by Congress to ensure wealthy individuals and corporations would pay a certain level of tax no matter how many deductions they could claim. Over time, though, more “regular” taxpayers began to fall under this umbrella because of how inflation raised their incomes. Under the 2017 Tax Cuts and Jobs Act, new AMT rules significantly reduced the number of taxpayers affected by it, by raising income exemptions and phase-out thresholds (income level at which one must pay the AMT). However, Congress did not vote to renew the 2017 Act, which means 2025 is the last tax year to which it will apply. Major triggers for AMT include: These triggers will be somewhat lower when filing for the 2026 tax year, in 2027. These are just some considerations to be aware of when prepping your 2025 tax return. We repeat: Be sure to report all your income as well as expenses for the year. Aside from anything else, the 1099s and other income forms you receive are also transmitted to the IRS, which an agent may compare to your signed return. Hire a qualified, trusted tax professional to assist with your return. And if you have any legal questions regarding past or current taxes, or the IRS has contacted you about payments still owed, call Ag & Business
Keeping Up With the Times: Indexing Exemptions to Inflation
When the Bill of Rights amending the U.S. Constitution went into effect in late 1791, the Seventh Amendment stated in part that “the right of trial by jury shall be preserved” for “the value of controversy” over $20. This meant that anyone could demand a civil jury trial for a dispute involving something exceeding that value. That $20 in 1791 is worth about $700 today. But since the Seventh Amendment isn’t indexed for inflation, anyone can still demand a jury trial for a dispute of over $20. Indexing just means adjusting for inflation over time. One place most of us see this in action is when completing our federal tax returns each year. You may notice the “standard deduction” that applies if you do not itemize your deductions throughout the year (as most individuals don’t). This, coupled with shifts in income brackets from year to year, aims to fairly adjust the taxes you owe so you’re not penalized with a higher tax rate if your income only rises at the same rate as the cost of goods and services. Your buying power isn’t increasing — so your tax rate shouldn’t, either. So how does indexing apply to bankruptcy and debt collection? Personal property exemptions By and large, the legislators who write bankruptcy and debt collection laws recognize that while it’s important for filers to repay debts, it’s also vital that they not be left destitute with no belongings. Federal and state bankruptcy laws contain exemptions from debt collection for things like homes, vehicles, clothing, household goods and furnishings, some cash, retirement accounts, and more. There are several reasons for this. Stripping someone of all assets to satisfy debts, including tools of their trade, a means of travel, a place to live, everyday supplies, and all cash could make it difficult for them to reasonably support themselves, which in turn costs society in public assistance and reduced economic productivity. It’s in our collective interest for debtors to be able to live their lives even after creditors have collected their debts. The law also recognizes the dignity of keeping certain possessions, with exemptions for valuables such as wedding rings, books, and similar things with a sentimental value greatly exceeding their typically marginal market value. This article will focus on personal property exemptions, or everything that’s not real estate. Iowa generally offers robust personal exemptions — in addition to the categories above, the state allows debtors to protect their interest in disability income, veterans’ benefits, alimony, firearms, 529 college savings accounts, structured personal injury settlements, federal pensions, medical aids (why take someone’s CPAP or walker?), and internment spaces from creditors. In many cases, however, Iowa has not kept up with the times, and decades of inflation have eroded the value of the exemptions the state legislature granted to debtors. Inflation indexing: Not new, but not common The federal Bankruptcy Code and at least eight states index personal property exemption values for inflation, but as in most states, Iowa has not done this. When they have been updated, Iowa lawmakers have generally set fixed dollar amounts that remain unchanged until the next legislative update. The most recent update to any Iowa personal property exemption values was nearly 20 years ago, and others go back even further. One exemption, for a bankruptcy debtor’s interest in accrued wages and tax refunds, has not been updated since 1981 — the Iowa legislature set that exemption at $1,000 and it remains the same today. Had it been indexed for inflation according to the U.S. Department of Labor’s Consumer Price Index (CPI), that exemption would now be more than $3,600! For a more concrete example, consider Iowa’s motor vehicle exemption. In 2006, lawmakers updated the exemption for a motor vehicle to $7,000; with a CPI-indexed update, that amount would be close to $11,150 today. Inflation’s effects on this exemption are real — in researching Iowa’s exemption history, I found a Cedar Rapids Gazette classified ad from 2006 that listed a 2001 Grand Caravan with 103,000 miles for $7,000. Right now, Kelley Blue Book states a 2020 Grand Caravan with 103,000 is worth around $11,230 — not far off from an inflation-indexed exemption of $11,150. Because of inflation and the fixed value of Iowa’s motor vehicle exemption, the vehicle a debtor could exempt today is likely to be in significantly worse shape than the vehicle they could have exempted when the law was passed, since $7,000 doesn’t buy the same used car it did in 2006. Inflation devalues other exemptions too Other categories last updated in 2006 were post-marriage wedding/engagement rings, $7,000 (which would index in 2025 to $11,150); jewelry other than wedding/engagement rings, $2,000 ($3,175); household goods and furnishings, $7,000 ($11,150); and “wildcard” or otherwise uncategorized items often used for cash, $1,000 ($1,600). The residential rental or utility deposits or prepaid rent exemption of $500 was last updated in 1996 — this allows a debtor to keep up to $500 of cash deposits or paid-ahead rent on an unexpired lease. This is the amount they do not have to turn over to a bankruptcy trustee or a creditor’s garnishment. However, if the law had included CPI indexing, that exemption would now be $1,025. Other Iowa exemptions include: The last two are particularly relevant to farmers. The farming tools exemption is obviously a benefit to them, but many also work on the side in construction, trucking, manure hauling, or another job. Farmers with a side business can use the non-farming tools of the trade exemption in addition to the farming tools of the trade exemption. I recently had a bankruptcy client who was both a farmer and did construction, so he was able to take advantage of the $10,000 for what he used in each category. If Iowa law indexed exemptions for inflation, my client could today exempt up to $28,800 each for farming tools of the trade, and non-farming tools. See what a difference indexing makes? Indexing for inflation makes sense While nobody likes to think about it,
Future Financial Prep ‘Tis the Reason for Enterprise Analysis
Santa Claus is a kindly old soul who makes young and old happy with gifts this time of year—but I’ve never heard of him excusing a farmer from having to prepare their taxes or submit an updated balance sheet to the bank for a loan or operating line renewal. End-of-year preparedness is a gift that only you can provide yourself. For a farmer or other business owner, December is filled with more questions than usual. Here’s a sampling: This final type of question rarely appears on its own, usually accompanied by concerns about costs, farming or business practices, suppliers, rent or facilities expenses, and much more. Not only is conducting an enterprise analysis of your farm or other business a great way to answer immediate questions, it is a necessity to provide an overall snapshot of the operation’s financial and legal health. The Enterprise Analysis You already know what “analysis” is; an “enterprise” is just a line of business or profit source. Your farm may be made up of multiple enterprises. Let’s say you grow corn and soybeans for an elevator, but you also sort, package, and market some seed—these are likely to be two different enterprises. If you also raise cattle or hogs, there’s another. Common farm enterprises include, but are not limited to: The enterprise analysis simply means examining the individual enterprises within your operation to determine the profitability of each, then isolating the factors contributing to that profit or loss so you can make informed choices going forward. Suppose you grow crops and run a farrow-to-finish hog barn. Are each of these income streams profitable? Or are the crops profitable, but the swine is experiencing losses? If this is the case, you would carefully analyze why the farrowing operation is losing money. It could be disease problems—if so, consider whether you can control the disease or should discontinue farrowing. If it is a management problem, you could consider hiring a qualified manager to oversee the operation, increasing efficiency and profitability. If the losses are in the crop operation, maybe the rent is too high on some or all leased farms. Do you lease more than one farm, but one or more property’s rent is disproportionately high, such that the lack of profitability is pulling down the profit earned on the other farms? Maybe you shouldn’t be farming that ground, and should cancel the lease when you are able. Or, if your owned land cannot support the debt load, should you consider selling some land to decrease the debt and improve the operational cash flow? This is always a controversial question, since the farmers I know would rather sell almost anything they own than a piece of ground—it’s like asking them to part with a family member. Crop enterprise analysis questions are admittedly more suited to a mid-year evaluation, since in Iowa, September 1 is the deadline to give notice of lease non-renewal. They do, however, serve to illustrate the importance of one type of analysis; and late in the year is timely for analyzing other streams of farm and business income such as livestock, meatpacking, on-farm stores, and other enterprises. Parts of the Picture Some underlying tools for enterprise analysis should be consistently updated, not just once or twice a year, which is our recommended frequency for performing full analysis. One important tool is the farm balance sheet, which you should always keep updated but is especially vital this time of year, since your bank will require it to consider your application for any loan or renewal of an operating line of credit (as Chief Financial Strategist Keith Starr covered in last month’s blog entry). As the shareholder of Ag & Business Legal Strategies, I get an updated balance sheet and P&L (profits and losses) sheet and a productivity report by an employee every week from bookkeeping. These help me gauge productivity and provide early clues about any potential problems that could impact the firm so I can course-correct production problems, spending, and collection of receivables. I highly recommend having the farm’s bookkeeping done on at least a monthly basis. This will allow you to make changes and course corrections quickly. It will also allow you to take advantage of opportunities that arise throughout the year. Keeping the books up-to-date and analyzing them regularly will help you know where you’re at and avoid guessing when you make critical decisions. It can assist you to decide whether to change spending, renegotiate debt with creditors, or change marketing plans for your farm commodities. It also makes it easier to obtain loans from creditors, when you come prepared with a solid business plan. As I mentioned earlier, December is your last chance to take action to determine the bulk of your tax strategy for this year. Now is the time to determine if you will order and prepay seed, fertilizer, and chemicals for 2025 production and deduct those expenses from this year’s income. Too, are you planning to buy or lease new equipment for 2025? Purchasing equipment can also decrease taxes. (IMPORTANT: Do NOT purchase equipment just to reduce taxes. Borrowing money to buy equipment that is not necessary can jeopardize your farm’s cash flow and long-term viability. Equipment purchases should be prudent business decisions—not reactionary decisions to minimize tax liability.) Do Regular Analyses Here’s one practical way a recent enterprise analysis can inform tax strategy. Back in the summer an analysis revealed your crop enterprise is not as profitable as you would like and you have been looking for ways to trim expenses other than rent, since the review determined that was not a major factor that can be changed this year. Knowing this and seeing that fertilizer inputs have been high for some time, you reviewed the soil test results that showed you have high levels of nitrogen and phosphorus. You decide to decrease their application rates for a year or two, knowing you can save money without harming yield or adversely affecting overall soil fertility. A
A Gift That Keeps On Giving: Operating Line Commitment in December
This holiday, the best gift for a farmer is one they can seek themselves: Securing an early commitment from their lending institution for a 2025 operating, or input, line of credit. Depending on a farm’s financial strength, an operating loan is used for different things, most often for bulk purchases necessary to yearly operations: fertilizer, chemicals, seed, cash rent paid upfront, and other vital inputs. If your farm is doing well and not under much stress, you may dip into it to help pay for family living expenses, utilities, and the like as needed until payoff. The more stress your farm is under, the more control the bank may assert over the loan. This might include only advancing funds if an invoice is presented, for example, or a strict limit that does not allow for unforeseen expenses—such as for major engine repair, or underestimating your cost of inputs. Secure Your Loan Early November is the time to assemble your materials and make an appointment with your banker, as soon as you have a good handle on your 2024 harvest volume. There are several reasons to secure a commitment before the end of the year, including the availability of immediate cash to take advantage of input specials. Seed, fertilizer, and equipment dealers want to make cash sales this time of year and are often willing to extend discounts, rewards, and lower interest rates to coax farmers into buying inputs or putting a down payment on equipment in the fourth quarter. (It is not advisable to use an operating loan to purchase equipment or vehicles in full, as this could result in negative consequences for your debt load—you might run out of operating line early or be unable to repay it after harvest.) Another good reason to secure early commitment: More control over taxes. Having ready cash allows you to buy inputs at a time advantageous to your financial position. If it’s been a great year, you may decide to do more business spending before January 1 to lower your tax burden. Keep in mind, though, if you have not finalized your 2023 income taxes yet, doing this may make you look like a less qualified borrower. Peace of mind is not tangible like the first two benefits, but I’d argue it’s just as important. The earlier you step up to take control of your financial situation and request an operating line of credit, the more you can influence a positive decision. What if the bank you’ve been using for 20 years turns you down because the loan officer you’ve worked with retired and the new one doesn’t understand how farm income works? Knowing obstacles early allows time to apply at other institutions if necessary. I knew someone who couldn’t plant because the bank put off an operating line commitment even though everyone thought it would eventually approve the loan. The bank decided in late February—less than a week before the farmer’s rent payments were due—that it wouldn’t offer the loan. Because this farmer waited too long on the decision, he didn’t have time to find another bank. It’s always better to be overly prepared. How To Better Butter Up Your Bank A bank is a business. It is not your friend, although its employees are often friendly. Banks have regulations about how much risk they can take, so if a regulator views your operating loan as unsound for any reason, your banker is required to take action. This may mean not granting you a new operating loan. Or, if you have a loan and your bank requires its name to be on all checks made out to you, the bank may refuse to cash them unless the funds go first to a loan payment. If you budgeted that income for rent or a vendor, it may mean that creditor won’t be paid unless they filed a landlord’s lien or otherwise protected their interests in advance. If you don’t have an “inside man” with the bank to keep you apprised of how things are going behind the scenes—and most people don’t—you may not realize how likely or not it is to approve your loan. If each time you call you are told “I have to check with our main office” but never receive an answer, or you are put with a new loan officer you don’t know, it could be cause for concern. You can be aware of your balance sheet and debts in such a way to meet with the banker around December 1 armed with the best information to increase your chance at success: Know When To Seek Professional Advice It is important to recognize when you need assistance, and Ag & Business Legal Strategies is here to help. With combined decades of experience in not only law and banking but also agriculture, our attorneys and I have worked with ag operations in all types of situations, so we know what options are available depending on circumstances. We can help analyze your operation and financials, restructure debt as necessary, and advocate on your behalf with your lending institution. We have never assisted in a situation in which a farmer called us “too soon”—if you have a feeling something isn’t right, heed it sooner than later. Contact us when harvest is done, or sooner if you can see coming up short on bushels or projected income. The sooner you reach out, the earlier we can help you stabilize your financial position. The longer you wait, even if it’s just until January or February, the more likely you could be out of business come April. Call Us: (319) 363-1641 At Ag & Business Legal Strategies, we want our clients to be honest with themselves and have a solid business plan. Our attorneys and financial strategist will help you create and execute that business plan, and, if necessary, assist you with the legal, tax, and practical aspects of debt restructuring or bankruptcy. Don’t wait for the problems to become insurmountable. Connect with
Chapter 12: The Farmer’s Ally in Debt Recovery
Farmers are special in many ways. John F. Kennedy said, “The farmer is the only man in our economy who has to buy everything he buys at retail—sell everything he sells at wholesale—and pay the freight both ways.” Farmers form the foundation of our nation’s food supply. In recognition of their unique place in our economy (and of their lobbying prowess), farmers have access to specialized tools in bankruptcy that no other debtors have. This starts with Chapter 12 of the Bankruptcy Code. Why Chapter 12? In legal parlance, “chapter” is a shorthand way of referring to a bankruptcy filed under that specific chapter of the Bankruptcy Code. Individuals usually file Chapter 7 (liquidation) or Chapter 13 (repayment plan) bankruptcies. While businesses can liquidate through Chapter 7, they most often reorganize through Chapter 11 bankruptcies. Small businesses can take advantage of Chapter 11 Subchapter V bankruptcies. Chapter 15 bankruptcies are for international companies to file. And family farmers and family fishermen can file under Chapter 12. Chapter 12 has the same basic thrust as other reorganization (Chapter 11 of all varieties) or repayment (Chapter 13) bankruptcies: Paying creditors fairly while allowing the business or individual to escape overwhelming debt loads and hopefully continue being productive members of society. However, Chapter 12—particularly for family farmers—gives overwhelmed debtor options unavailable in other bankruptcy chapters. A full list of these differences is the topic of an hour-long continuing legal education course for lawyers (Ag & Business Legal Strategies attorneys have taught courses like this), so we’ll focus on one near and dear to our hearts: Tax deprioritization. Taking the Bite out of Taxes Benjamin Franklin famously quipped, “In this world nothing can be said to be certain, except death and taxes.” In all chapters of bankruptcy, taxes are granted special “priority” status, meaning they get paid first in a liquidation and must be paid in full in a reorganization or repayment plan. If they are not paid, they are not discharged at the end of the bankruptcy. In contrast, non-priority “general” unsecured claims typically receive pennies on the dollar and are practically always discharged at the end of the case. The problem is that in a typical farm Chapter 12, the debtor has sold or needs to sell farm property to right-size their operation so it is profitable—but those sale proceeds have to pay down the bank and other secured creditors, leaving no money to pay tax bills that are frequently massive. This can force farmers to liquidate instead of reorganizing. Chapter 12 allows family farmers to turn the tables on the tax man. Under Chapter 12 a family farmer can treat the taxes from liquidated farm assets as general unsecured claims (and therefore typically to be paid pennies on the dollar) and discharge any unpaid taxes at the end of the bankruptcy. This can save a Chapter 12 family farm debtor tens or even hundreds of thousands of dollars. How does Ag & Business Legal Strategies know so much about tax deprioritization for family farmers? We regularly file for clients under Chapter 12 and deprioritize their taxes—Ag & Business Legal Strategies filed the first case to use tax deprioritization, in fact, and we’ve helped family farmers deprioritize hundreds of thousands of dollars in taxes. We also often speak and write about Chapter 12 and tax deprioritization. Most of all, our firm’s founder, Joe Peiffer, helped draft the tax deprioritization statutory language, twice—both originally and then again after the Supreme Court found the flaw he had identified in the original language. Here to Help At Ag & Business Legal Strategies we often describe Chapter 12 as the most powerful chapter in the Bankruptcy Code. Tax deprioritization, a high debt limit, and the ability to confirm a reorganization plan without having to persuade creditors to support it are just some of the reasons it deserves that distinction. If you’re a struggling family farmer or know one, reach out to Ag & Business Legal Strategies today. We can help you evaluate your farm business as a whole and, if appropriate, help you file a Chapter 12 bankruptcy, right-size your operation, and deprioritize the taxes from those liquidations. Contact us now—we can do so much more to assist you if we’re brought in early, rather than after everything is falling apart. At Ag & Business Legal Strategies, we want our clients to be honest with themselves and have a solid business plan. Our attorneys and financial strategist will help you create and execute that business plan, and, if necessary, assist you with the legal, tax, and practical aspects of debt restructuring or bankruptcy. Don’t wait for the problems to become insurmountable. Connect with someone you can trust today, not tomorrow.
Putting the ‘Success’ Into an Effective Succession Plan
If you’re an older farmer with land and business assets, or even a younger one who owns property and you’ve started a family, chances are you’ve worried how those you leave behind will be taken care of after you’re gone, and how your farm’s legacy will live on. While I encourage anyone to write a basic last will and testament with an attorney’s advice, farmers and business owners generally need more than that, in the form of succession planning. Its aim is to establish the means by which you will transfer your farm or business to heirs or otherwise set up an exit strategy from the operation. Among business owners, farmers particularly feel a special tie to their property and especially want to see its purpose continue, within the family line if at all possible. A succession plan is the most effective way to achieve those goals. Why a Succession Plan? Several decades ago, Mother Nature often reminded farmers at a younger age it was time to pass the reins to a younger generation. Agriculture was more taxing on older generations who didn’t have the equipment and technology we do today, plus there seemed to be fewer roadblocks and expenses for the children of older farmers to work in and then take over the family operation. The Farm Crisis of the 1980s removed a lot of generational wealth from farm families and sent many would-be farmers and ranchers into off-farm careers. Partly because of this—and the tax consequences associated with transferring property while still alive—many farmers who were able to keep their land continued actively managing it for a longer time, until a child or grandchild showed ability to take over management. If this did not happen, they sold it or they bequeathed it to heirs upon death. According to Iowa State University figures, two-thirds of the state’s farms are now owned by people over the age of 65 and almost 40 percent are owned by those over 75. Of course, emotions also play into planning for the future of one’s land and operations. There’s an old saying that if you love what you do, you’ll never work a day in your life. While this may not strictly be true when it comes to the many demands of a farm, the fact is that farmers enjoy the work and the sense of purpose and accomplishment. For this reason, many find it difficult to imagine stepping back and giving up control even to a trusted heir. This is even harder if the farmer doesn’t feel confident in a clear heir to take over. Another major factor is the requirement to face one’s own mortality, since we are not a culture that comfortably discusses death. But careful planning is necessary to ensure the legacy of your work lives on, and that your heirs are well cared-for and face fewer financial consequences as recipients of your estate. Basics of the Succession Plan Your succession plan begins with a clear balance sheet that lists your assets and liabilities. You may want assistance with this from a local financial planner or certified public accountant (CPA), if you don’t already have one with whom you work. They can also provide you a written reviewof the tax consequences of your decisions—for example, if you wish to sell or transfer any assets while still living—and an evaluation of what your assets are realistically worth. Next, what is the intent of your succession plan for heirs? This depends not only on their desire to farm or manage the operation, but also on your comfort with their ability to do so. Is there one child who is clearly qualified to take over, but you worry you cannot divide assets enough to keep the farm intact for them and still provide your other children with an equitable inheritance? Situations like this require tough conversations. I advise speaking with each of your intended heirs to make your wishes clear and ask their opinions, and perhaps even holding a family meeting to discuss options and get feedback. This is not something you should leave unsettled at your passing. I’ve worked with farmers who say, “I don’t want to deal with who gets what; they can sort it out after I’m gone.” This has led to far too many siblings seeing their last civil conversation take place across the grave. As an example, one farmer I worked with arranged for his real estate holdings to be put into a trust when he died, to be accessed and managed equally by his children. He set it up so if one of them needed to withdraw from the assets, the other three siblings received equal payouts. This gave all incentive to participate in management of the farm and its revenue stream, as well as equal say on any loans to be taken out on the properties. He understood his children had the sort of relationship for which this worked best for them, but you may need to set up your plan differently—and that’s all right. Next, consider the urgency of your need for a succession plan, and realistic financial considerations. Are you in good health that gives you time to plan? Or are you ill? Is your spouse or a child ill? Has a child passed on and left a spouse or grandchild who may need immediate assistance? Do you need to plan for any gifting or transfer of assets in your lifetime, or will you leave it all until your passing? In this vein, it may be helpful to consider your assets in separate groups rather than a mass inheritance. For instance, farmland value tends to remain evergreen, while the state-of-the-art tractor you just purchased could be obsolete in 10 years thanks to technological upgrades. Perhaps you should transfer equipment sooner than later to a farming heir, while they can use it. Another consideration might be if you mandate that the farm continue to be operated as it is under your management and, if
Get an Early Start On Future Equipment Needs by Planning Strategic Farm Equipment Purchases
There’s no need to check your calendar upon reading this to make sure it’s flipped to the right month—it is still just March! While it is more common for financial advisors to check in with their farming clients about potential advantages of new farm equipment purchases and leases in the later months of the year, to beat the December 31 deadline in planning their following spring’s income tax filing, thinking further ahead for such sizable purchases may be a wise idea. Beginning the decision process now gives you extra months of consideration and weighing your options, not to mention keeping an eye on sellers for ideal pricing. If you feel 2024 is the time to buy a new tractor, planter, feed mixer, grain cart—whatever you believe you need—first, consider your operation. Are you earning a profit? If you buy the new equipment outright or finance it, will you still be earning a profit with the payments? If the answer to either of these questions is “no,” it is likely not a good time to commit to that kind of expense. Your farm is a business, and the goal is to earn more than you spend. Any expenses for that business should enhance its ability to maintain or increase its profit. This includes the gamut of purchasing new (or used—but new to you) equipment to enjoy tax advantages. Section 179 deductions allow you to deduct up to $1.16 million in qualifying equipment necessary to the operation of your farm business either wholly, or in part while amortizing the balance of the value. Your accountant or tax advisor can go into more detail about the specific requirements of the federal tax code. Depending on what equipment you’re considering, its cost, its use, and return on investment might indeed put you in a better position after taking into account the tax advantages. But if you buy something only to shield any profit from taxes and it doesn’t satisfy these other business tenets, you may find the advantages do not outweigh the costs. Remember, if farming is your vocation instead of merely a lifestyle your overall goal is not to minimize the taxes you pay, but to maximize farm profit. Don’t let temporary savings override good long-range planning. What are the alternatives? Consider the non-tax reasons to consider an equipment purchase. Do you truly need it, or do you just want the newest or prettiest model? Farmers for whom agriculture is more of a lifestyle than a vocation and have significant outside sources of income or capital do not have the same limitations as those who must carefully budget and plan their capital expenditures. If farming is merely a lifestyle then profit and loss are secondary, the primary goal is to enjoy farming while not costing too much. If instead farming is your vocation, the means by which you put food on the table for yourself and your family, resist the urge to try “keeping up with the Joneses” by going into unnecessary debt. Say you really do need new equipment, and that your tractor, combine, sprayer, or whatever doesn’t work as well as it once did, is no longer the right size or horsepower for the demands of the job, or is costing you more in increased labor or fuel. Is there an alternative to a new purchase? For instance, if you don’t use the equipment often enough to justify ownership cost or a monthly lease payment, you could rent a newer or bigger one from a dealership as needed. Or you could hire an independent contractor to come in with their own equipment to do the work. Either of these is likely to be less expensive. If you really need new equipment to use more often, perhaps there is a way to lessen the possible cost. Is there a family member who also farms, or a trusted neighbor, with whom you could split the cost and rotate its usage? If not, and you alone are on the hook, consider carefully what your needs are and if you can get by with a used or smaller model, less horsepower, or a different brand name. In summary: Consider your whole farm business and how each asset, current or additional, fits into its smooth operation! Even if you can’t afford equipment this year, this is a good exercise for reviewing your farm business and its assets, debts, and profit margin. If you find your expenses and debt are more than you realized and would like assistance in reviewing your options, Ag & Business Legal Strategies would be happy to discuss your situation and to see where we can help. At Ag & Business Legal Strategies, we want our clients to be honest with themselves and have a solid business plan. Our attorneys and financial strategist will help you create and execute that business plan, and, if necessary, assist you with the legal, tax, and practical aspects of debt restructuring or bankruptcy. Don’t wait for the problems to become insurmountable. Connect with someone you can trust today, not tomorrow.
USDA OKs Choice for Farmers to Keep Inflation Reduction Act Relief—or Not
In the months since we visited the scenarios of Robert and Charles—two fictional farmers who received farm debt relief under Section 22006 of the 2022 Inflation Reduction Act (IRA)—the Farm Service Agency (FSA) has announced two major changes in how recipients can choose to deal with their new windfall. Last year FSA repaid more than 13,000 farmers’ delinquent FSA-direct or FSA-guaranteed loans with IRA funds. With FSA’s new guidance in April, those farmers have choices and tools they can use to remedy the unintended consequences this repayment caused. Distressed Borrowers Now Have Choices In February, we met Robert and Charles, two fictional farmers who benefited from $800 million in IRA funds the USDA paid out in relief for distressed borrowers. To recap: Robert defaulted on his FSA-direct loan in 2010 and the FSA foreclosed on his property, leaving an unpaid $100,000 deficiency judgment. His account was moved to currently not collectible, or CNC, status with no payment since. As of last year, his total balance was $150,000, including $50,000 interest. Charles took out an FSA-guaranteed loan from a local bank and has been in default for several years. He has continued to farm while working with his bank under forbearance agreements, and his debt was moved into CNC status in 2019. The FSA repaid the remaining $400,000 of his loan last year, along with $12,000 in interest. The IRA at first seemed like a win for both farmers, until each was left with a massive tax headache because the Internal Revenue Service (IRS) treats the principal repayments as income for 2022. For tax purposes, Robert earned an extra $100,000 and Charles, $400,000; now each owes additional taxes of approximately one-fourth of their principal relief. (The repaid interest is deductible.) Worse, this additional income could push Robert or Charles above income thresholds for nutrition assistance such as SNAP or WIC, or from being able to use federal subsidies to help offset the premiums of self-employed health insurance. It could also cap their ability to contribute to certain retirement accounts. Updates Offer New Options Thanks to overwhelming feedback from advocates including Ag & Business Legal Strategies, on April 6 the FSA sent affected farmers a letter notifying them of two new options they have to deal with this sudden “principal income” (reflected on tax Form 1099-G, “Certain Government Payments” as part of reportable income for 2022). The first is simply a change in status afforded to FSA-direct loan recipients. The FSA recharacterized these direct debts as being canceled rather than repaid; affected farmers should have since received an amended Form 1099-G and Form 1099-C, “Cancellation of Debt.” For Robert cancellation means if he was insolvent before the forgiveness, his tax bill is reduced. If he was still insolvent after the cancellation, then there will be no tax bill. Returning IRA Aid—Some Farmers’ Best Option The second major change the FSA announced is that farmers who had their debts repaid by IRA funds now have the choice to opt out of this assistance. While refusing free money might seem odd, tax consequences might make this the right choice. Note that Charles doesn’t get the choice of the FSA canceling his debt—the FSA can’t cancel debt it guaranteed, it can only repay it or not. Faced with owing about $100,000 to the IRS, he might see smaller payments to the bank on the $400,000 over a long time as easier than paying the taxes sooner. He also has the option to file for bankruptcy, as FSA debt (or FSA-guaranteed debt) is generally dischargeable in bankruptcy while recent tax debts are not. If he decides one of these choices is better, he has until December 31, 2023, to contact his loan officer or the FSA with a written request declining IRA Section 22006 assistance. On the other hand, maybe Charles’s accountant can work out a longer payment plan or an offer in compromise with the IRS, in which it would accept less than the $100,000. This could be better if maintaining the original debt to the bank is hindering his ability to borrow again and he can’t file for bankruptcy. Another exception that could allow Robert or Charles to avoid paying taxes is if the debt is qualified farm indebtedness: ABLS urges farmers with tax problems to ask their accountants about deferring their tax liability through the qualified farm indebtedness exclusion — accountants may wish to read this blog post written by Ag & Business Legal Strategies friend and agricultural law and tax expert Roger McEowen. If you received Section 22006 assistance but wish to decline, remember to contact your loan officer or the FSA before the end of this year and express your intent in writing. The FSA Call Center number is 1-877-508-8364. In Conclusion The final major clarification FSA offered is that accepting IRA assistance, whether that is debt repayment or debt cancellation, will not affect a farmer’s eligibility for future FSA funding. This was a concern at least one Ag & Business Legal Strategies client had. In March the FSA announced it was providing a new round of $123 million in IRA relief to direct-FSA borrowers who qualify. These repayments were set to start going out in April. If you received notification on your loan, or have questions about qualifying factors, you can read more here. The USDA’s and FSA’s efforts to provide additional relief in the wake of the IRA’s unintended tax consequences are certainly welcome. Ag & Business Legal Strategies is grateful the agencies recognized and addressed this, and that we were able to help shine a spotlight on these issues for them. If you have questions about your situation and how to proceed, contact your accountant, then reach out to Ag & Business Legal Strategies. We would be happy to help you plan a strategy to achieve your repayment and/or business goals. At Ag & Business Legal Strategies, we want our clients to be honest with themselves and have a solid business plan. Our attorneys and financial strategist will help you create and execute that business plan, and,
From Debt to Deliverance: Paul and Linda
Note: This is the second of a three-part blog series about ABLS clients and their debt resolution stories. In March we shared the story of retired Iowa farmers Jerry and Deb and the debt restructuring plan we developed for them. In this blog meet another Iowa farm couple, Paul and Linda. An average crop in 2012, a worse crop in 2013 and no crop in 2014 was the beginning of Paul’s and Linda’s woes in eastern Iowa. Paul described what happened next: “We lost one of the farms that we were (working), and that was a third of our acreage for farming. So we didn’t have enough acres to cover our leftover expenses the following year. Plus, the co-op we were working with was hedged-to-arrive and had a change of management, and those people didn’t understand hedge-to-arrive, and forced us to sell at a high tide and we were on the wrong side of the market. That left a deficit that was impossible to overcome.” On top of that, the couple’s bank had a change in management. The new management didn’t understand farming. Paul told bank managers if they wouldn’t work with him on loan repayment he would have to declare bankruptcy and face a tax bill he and Linda couldn’t afford. Body shop, healthy body, and hope We first met with the couple in 2015, shortly after Linda was diagnosed with a form of blood cancer. We determined they couldn’t work through their debt issues outside of bankruptcy, even with the income Paul received from his body shop business. Paul and Linda filed for Chapter 12 in April 2016, and the bankruptcy court confirmed their reorganization plan in early 2017. Paul was able to continue running his body shop and, in fact, has expanded his business. Linda is now cancer-free and sells essential oils. The couple no longer farm but still live in their home post-bankruptcy, and the Chapter 12 addressed their tax bill. It all works out “I grew up on a farm and farmed for 40 years. It was a way of life,” Paul says. “To stop farming was very difficult, but when you have someone like Joe Peiffer reassuring you that everything will work out, it was an easy decision to file Chapter 12.” If farm debt is becoming unmanageable for you, be proactive and reach out to us. Don’t wait – do it today. At Ag & Business Legal Strategies, we want our clients to be honest with themselves and have a solid business plan. Our attorneys and financial strategist will help you create and execute that business plan, and, if necessary, assist you with the legal, tax, and practical aspects of debt restructuring or bankruptcy. Don’t wait for the problems to become insurmountable. Connect with someone you can trust today, not tomorrow.
From Debt to Deliverance: Jerry and Deb
Poor crops. A barn fire. Disabling injuries. New bank managers who don’t know you and are less cooperative than the ones they replaced. Our clients have experienced devastating events like these, and more. Events that threatened to leave them destitute. In this month’s blog, and in April and May, we’ll share stories of three farm families who accumulated stifling debt and came out the other side with financial stability and peace of mind working with us. We begin with Jerry and Deb: Jerry and Deb were living comfortably on their eastern Iowa farm. Between raising Simmental cattle breeding stock, Jerry’s construction business, and Deb’s job at a local community college, all was right with the couple entering the new millennium. Trial by fire, and then some Then came 2002. A barn fire destroyed their feed inventory, and most of the machinery housed inside. Insurance was $60,000 short of replacing what was lost. “It was almost a precursor of what was to come,” Deb says. A 2005 drought hurt Jerry’s hay production, forcing him to dip into winter feed for his cattle. Moving hay one day Jerry was thrown from a four-wheeler, breaking both arms. He recovered just in time to shatter a leg and ankle in 2006 when a scaffold he was standing on gave way. Further pain arrived in 2008 when the farm economy cratered. The couple rapidly accumulated hundreds of thousands of dollars of debt. Their bank demanded loan payments – money Jerry and Deb didn’t have. Foreclosure loomed large. “In 2006 I felt we could come out of it, so we kept plugging away,” Jerry says. “Then 2008 hit and the financial institution matter happened, and I thought that would be the end of us.” An alternate bankruptcy plan Jerry and Deb talked with financial advisors, who recommended they file Chapter 11 bankruptcy. Jerry refused, convinced there was a better way. “I gave Joe Peiffer a call and he said, ‘No, you don’t want to file Chapter 11. You should file Chapter 12,’” Jerry says. “He probably knew the Chapter 12 tax code better than anyone else in Iowa.” Chapter 12 was written in the wake of the farm crisis in the 1980s, but Joe had recently helped rewrite it to give family farmers tax relief. Chapter 12 is specific to family farmers and fisherman and allows them to avoid foreclosure and reorganize their operations or liquidate in a controlled manner. Freedom from debt Over the next 12 months we met several times with the couple and accompanied them to mediation with the bank. Jerry and Deb sold some acreage and more cattle as we began crafting a bankruptcy plan. The Chapter 12 plan was filed in late 2009 and called for complete liquidation. The rest of the farm was auctioned off. “We sold the remaining ground, buildings, the construction equipment, farm equipment, household items and our home, all in one day,” Jerry says. Through Chapter 12 Jerry and Deb were able to discharge $49,741 in 2009 federal and state income taxes for pre-petition sales and approximately $25,000 taxes for the post-petition sales of assets. Today, Jerry and Deb are retired and living in northwest Arkansas, debt- and worry-free. “We would not have the life that we’re leading today if it weren’t for Joe,” Deb says. If farm debt is becoming unmanageable for you, be proactive and reach out to us. Don’t wait – do it today. At Ag & Business Legal Strategies, we want our clients to be honest with themselves and have a solid business plan. Our attorneys and financial strategist will help you create and execute that business plan, and, if necessary, assist you with the legal, tax, and practical aspects of debt restructuring or bankruptcy. Don’t wait for the problems to become insurmountable. Connect with someone you can trust today, not tomorrow.
Selling a Farm: Capital Idea or Capital Gains Tax?
Note: This is the second of a two-part blog series on buying or selling a farm Why do you want to sell your farm? Why do you want to buy a farm? In January, we wrote that before you put your farm on the market or negotiate a farm purchase, you should ask yourself those questions. Your answers will either confirm moving forward with the transaction or lead you to stand pat. In that article, we mentioned another consideration: taxes. This month, we’ll go into greater detail. Any significant taxes owed when a farm exchanges hands are likely to be the seller’s responsibility. The buyer’s main tax concern will be annual property taxes going forward (the seller generally pays them up through closing). So, it’s essential that a seller clearly understand their likely income tax liability. Back to the basis The main determinant of tax liability is “basis.” Basis is what you paid for the farm when you acquired it. For instance, if you purchase a farm for $1 million, that is its basis. By law, that $1 million you paid is not taxable. If you later sell the farm for $1 million or less, you realized no capital gain. Instead, a capital loss. Only the amount you sell the farm for above your basis is taxable. So, if that $1 million farm is sold for $3 million, only the $2 million above the basis is subject to taxation. At a long-term capital gains tax rate of 20%, this sale would generate $400,000 in capital gains taxes. Basis with barns and more Basis gets more complicated when you consider fixtures– non-land assets attached to the property. These are things like grain bins, hog barns, fencing, tile, and so on. Those items will have their own basis. To illustrate how fixtures can impact basis, let’s say you add $50,000 of fence around your farm. That $1 million farm in our example now has a basis of $1,050,000. You are allowed to deduct $10,000 a year in taxes on that fence because of depreciation. However, this depreciation reduces your basis, so in five years you’re back to a $1 million basis. Say after the fencing has depreciated away, you sell the original $1 million farm for $3 million. In the previous example you paid only capital gains taxes on the $2 million in gain. However, now you’ve depreciated $50,000 in fencing. For the sake of the sale, the fencing is considered ordinary income. So in our example, you wouldn’t owe capital gains on $2 million, but rather, on $1.95 million and then ordinary income tax on $50,000. Step-up the basis Another aspect of basis is step-up in basis. That comes into play when a farm owner dies and the farm is bequeathed to an heir. Whatever the farm is worth when the farm is passed down becomes the new basis, with no income or capital gains taxes paid. If the new owner sells the farm for the new basis value, they owe no capital gains taxes. That can be incredibly valuable to the heir, especially in our example of a $1 million farm later valued at $3 million. Two million dollars of additional value not considered capital gain! Trading places…and paying no tax Then, we come to 1031 exchanges. This is a rule that lets you defer taxes if you acquire another farm. It works like this: If you own a farm and you find another farm you’d like to have, you can avoid taxes if you sell your farm and buy the one you’re looking at for the exact same amount. By doing so, you can transfer the basis from your old farm to the new one you now own. You’re telling the government, “I’m not really changing anything but the dirt. The dollars are the same, so don’t tax me,” and they won’t. A 1031 exchange is something to think about if you want to move from one farm to another, or, if you’re being pushed due to situations like development, but it requires legal advice. A sticky situation Tax liability can become a real problem if your farm is mortgaged. If a farmer needs to pay down the mortgage and is selling the farm to do it, the bank gets its money and the farmer is left holding the bag on the tax bill. A farmer in that circumstance may be better off holding the farm and making mortgage payments until they are able to sell it, pay the bank, and retain enough to pay all the taxes. This situation is best avoided with scrutiny on the front end – only taking on debt that can be serviced comfortably, by only borrowing a fraction of the land’s value instead of most or all of it. If you feel the need to go to this limit, or you already have, that’s a financial crisis warning sign! In certain cases, Ag & Business Legal Strategies can help farmers use Chapter 12 bankruptcy to escape this tax trap. If you’re unsure about your farm’s basis, contact your accountant. Annual property tax information is available through your county assessor’s office. If you’re feeling the pinch and unsure how to navigate a sale or negotiate with a banker, give us a call. We at Ag & Business Legal Strategies are here to help. We are experts in agricultural law and have served dozens of farmers facing financial issues. Contact us today. At Ag & Business Legal Strategies, we want our clients to be honest with themselves and have a solid business plan. Our attorneys and financial strategist will help you create and execute that business plan, and, if necessary, assist you with the legal, tax, and practical aspects of debt restructuring or bankruptcy. Don’t wait for the problems to become insurmountable. Connect with someone you can trust today, not tomorrow. https://www.ablsonline.com/contact/
Unintended Consequences: The Inflation Reduction Act of 2022’s Farm Debt Relief Causes Farmers Massive Tax Headaches
For a deeper analysis into this topic, see a version of this article written for tax professionals and other interested parties here. On August 16, 2022, President Biden signed the Inflation Reduction Act (IRA) into law. Section 22006 of the IRA provided $3.1 billion for the United States Department of Agriculture (USDA) to provide relief for distressed borrowers under certain Farm Service Agency (FSA) direct and guaranteed loans. On October 18, 2022, USDA provided nearly $800 million in assistance to distressed borrowers to help cure delinquencies and resolve uncollectable farm loan debts: Unintended Consequences of the IRA Payments Farm debt relief is certainly welcome, especially to its recipients. However, when Congress authorized the IRA payments it did not consider that those payments would be counted as income for many recipients, leading to: Two Distressed Borrowers, Similar Problems Consider these two typical borrowers with FSA debts who are in currently not collectible (CNC) status, both of whom benefitted from IRA farm debt relief: Scenario 1: In 2010, Robert defaulted on his FSA-direct loan, which was secured by a lien on his property. When he could not obtain further financing, he could not continue his farming business and the loan went into default. FSA foreclosed, leaving a $100,000 deficiency judgment. Although FSA initially contacted Robert to collect on the debt after the foreclosure, the account was moved into CNC status, where it has remained for 12 years. As of 2022, his past due balance was $150,000, with interest.[1] Scenario 2: Charles has been in default on his FSA-guaranteed loan from a local bank for several years. Charles has continued to farm while working with his bank under forbearance agreements. The debt was moved to the CNC status in 2019. In October of 2022, FSA repaid his entire guaranteed loan to local bank. The payment consisted of principal of $400,000 and interest of $12,000. Now, instead of owing a long-term debt to his bank, with low payments and the option of obtaining a forbearance, he faces a large tax liability (equal to multiple years of payments) due all at once. IRA’s Effects: Increased Taxes While the IRA’s debt relief payments could have many consequences for recipients, for Robert and Charles the primary consequences are increased federal income taxes. Because of this repayment Robert could owe $24,000 or more in additional federal income taxes, and Charles $96,000. Since this debt relief was targeted at farmers who were behind on their payments, Robert and Charles likely cannot pay these bills. Current Nonviable and Viable Options Robert and Charles do have options to address their taxes, but all of them have significant downsides. However, two of the common tools for addressing these taxes are off the table from the get-go. Bankruptcy will not help Robert or Charles any time soon, because these tax debts will be nondischargeable (they will survive a bankruptcy) until at least 2026. Similarly, while insolvent taxpayers don’t pay tax on debt cancellation, that does not apply to a debt repayment like this. Robert and Charles could enter into an installment agreement to pay off their tax debts (with interest and penalties) over six year, if the IRS agrees and they can afford that additional cost. They could make an offer in compromise to the IRS to reduce the amount they owe, but that is a lengthy, difficult, and expensive process, often requiring professional assistance. Moreover, the IRS can take up to two years to review an offer in compromise. USDA is Considering Options to Assist Farmers with their Income Tax Problems. After being informed of the significant problems caused by the repayment of the debt for over 13,000 farmers, the USDA has held a series of meeting and considered three options to ease the income tax problems experienced by farmers: asking the IRS to streamline and ease offer in compromise criteria, giving farmers the option to retroactively opt out of this debt relief, and recharacterizing this debt repayment as debt cancellation instead. The USDA is also considering asking the IRS to grant IRA farm debt relief beneficiaries an extension of time to file their tax returns so they can better plan for and adapt to this unexpected income. It is also considering sponsoring professional tax assistance for affected farmers. Get the Advice You Need and Contact your Members of Congress! If you or someone you know received IRA farm debt relief but now don’t know how to deal with the tax consequences contact Ag & Business Legal Strategies today! We can assist in assessing the consequences, navigating the options, and making an informed decision. Moreover, contact your members of Congress! Tell them USDA needs to find ways to help farmers with the unforeseen tax consequences of the IRA’s farm debt relief. Download a letter template here. Read a deeper analysis here. [1] Thanks to Kristine Tidgren of Iowa State University’s Center for Agricultural Law and Taxation for Robert’s scenario.
Unintended Consequences: The Inflation Reduction Act of 2022’s Farm Debt Relief Causes Farmers Massive Tax Headaches (Deep Dive)
On August 16, 2022, President Biden signed the Inflation Reduction Act (IRA) into law. Section 22006 of the IRA provided $3.1 billion for the United States Department of Agriculture (USDA) to provide relief for distressed borrowers under certain Farm Service Agency (FSA) direct and guaranteed loans. On October 18, 2022, USDA provided nearly $800 million in assistance to distressed borrowers to help cure delinquencies and resolve uncollectable farm loan debts. Unintended Consequences of the IRA Payments Farm debt relief is certainly welcome, especially to its recipients. However, when Congress authorized the IRA payments it did not consider that those payments would be counted as income for many recipients, leading to: Two Distressed Borrowers, Similar Problems Consider these two typical borrowers with FSA debts who are in currently not collectible (CNC) status, both of whom benefitted from IRA farm debt relief: Scenario 1: In 2010, Robert defaulted on his FSA-direct loan, which was secured by a lien on his property. When he could not obtain further financing, he could not continue his farming business and the loan went into default. FSA foreclosed, leaving a $100,000 deficiency judgment. Although FSA initially contacted Robert to collect on the debt after the foreclosure, the account was moved into CNC status, where it has remained for 12 years. As of 2022, his past due balance was $150,000, with interest.[1] Scenario 2: Charles has been in default on his FSA-guaranteed loan from a local bank for several years. Charles has continued to farm while working with his bank under forbearance agreements. The debt was moved to the CNC status in 2019. In October of 2022, FSA repaid his entire guaranteed loan to local bank. The payment consisted of principal of $400,000 and interest of $12,000. Now, instead of owing a long-term debt to his bank, with low payments and the option of obtaining a forbearance, he faces a large tax liability (equal to multiple years of payments) due all at once. IRA’s Effects: Increased Taxes While the IRA’s debt relief payments could have many consequences for recipients, for Robert and Charles the primary consequences are increased federal income taxes. In 2022, the IRA program paid Robert’s deficiency, including interest, triggering $150,000 in 2022 taxable income. FSA will send Robert and the IRS a 1099‑G to report this income. Although Robert can deduct the $50,000 in interest paid on his behalf, he is liable for around $24,000 in federal tax, which he cannot pay. If Robert’s state levies an income tax, Robert might also owe state income taxes. When the IRA program paid Charles’s $412,000 debt, he also faced the prospect of significant income taxes, possibly exceeding $100,000. Fortunately, his CPA assisted him in avoiding payment of the income taxes in 2023 for his 2022 income. When FSA notified Charles of the debt repayment to his local bank, Charles immediately turned to his CPA who helped him prepare for this unexpected income surge. The interest is deductible, and won’t increase Charles’s taxable income, but the principal is not deductible. Charles was able to defer collection on some grain sales into 2023, he had Net Operating Losses (NOL) he could use to offset some of the income, and he purchased his 2023 inputs in 2022 to decrease his 2022 Schedule F income and minimize his 2022 self-employment taxes. Current Nonviable and Viable Options Robert and Charles do have options to address their taxes, but all of them have significant downsides. Bankruptcy is not a viable option. Right off the bat, one of the primary tools for dealing with debts is off the table: Any income taxes that Robert or Charles cannot pay would be priority debts in a bankruptcy and not dischargeable in bankruptcy until at least 2026. In that time the IRS and state departments of revenue are likely to file tax liens. There is nothing exempt from an IRS lien, meaning that if the taxpayer had any property with equity, like an exempt homestead, the tax lien would make the tax debt a secured claim in any bankruptcy. While a bankruptcy in several years could discharge the tax debt, it would not eliminate the tax lien, and the IRS or state department of revenue could levy on the property and sell it to collect the tax debt. The insolvency exception to tax liability for debt cancelation is not available. IRC § 108 provides an avenue to avoid the taxes due because of debt cancelation or debt forgiveness. § 108 is commonly referred to as the insolvent taxpayer exception. It allows taxpayers that were insolvent before the debt cancelation to exclude the income from taxation to the extent of their insolvency.[2] Because the debt was paid, not canceled, Robert and Charles cannot reduce their tax liability under IRC § 108. If the debt had been canceled instead of repaid, IRC § 108 would have been available to them to potentially eliminate the income occasioned by the cancelation of the debt. Alas, Congress did not take this route. Installment agreement. It is possible that Robert or Charles could work with the IRS to set up an installment agreement to pay off his tax debt over six years. This could put a significant strain on their finances until the tax debt is repaid. The IRS usually places a tax lien on the taxpayer’s assets until the installment agreement is completed. Moreover, interest and penalties continue to accrue until the debt is paid in full, and the IRS is not required to accept a payment plan. Offer in compromise. Robert and Charles’s best legal remedy may be to hire legal counsel and seek to negotiate an offer in compromise (OIC) with the IRS to lower the amount of tax for which they are liable. The OIC process is complicated and time consuming.[3] It can take many months to finalize, and it includes costly fees. There is no guarantee the IRS will accept an OIC, but IRS states that it generally approves offers in compromise when the amount offered represents the most the IRS
Before Buying or Selling a Farm, Ask “Why?”
Note: This is part one of a two-part blog series on buying or selling a farm. For part two, “Selling a farm: capital idea or capital gains tax?” see here. You want to buy or sell a farm. Before you push a “For Sale” sign into the ground or negotiate with the owner, make sure you’re doing it for the right reasons. We’ve advised many clients on how to put their farm on the market, or, conversely, what steps go into a farm purchase. However, one area clients often skip over is the why. Unless you’ve carefully thought out the “why” behind the transaction, you may end up selling the only part of your farm earning money or buying an operation that will only drag you down. Taking Everything Into Account The first consideration is how the farm is performing in, or would fit into, your overall operation. We help our clients perform an enterprise analysis — a deep dive into all of a farm’s assets and operations that produce income or add expenses, and determine the farm’s profitability and cash flow. An enterprise analysis takes a comprehensive accounting of everything from the farm’s infrastructure to production. With this analysis in hand you can project how selling or purchasing the farm will affect your enterprise as a whole. A seller might find that the farm is the only profitable part of the operation, or provides regular income essential to paying the bills when income fluctuates. A buyer might find that the farm they hope to buy would require too much travel to profitably operate, or require significant cash inflows at times when cash would be tight. If you’re selling, is it because you need the cash to finance another farm investment or meet some other expense? The enterprise analysis can help determine whether you’re selling a gold mine to buy or save a sewage plant, or vice versa. Once you’ve determined whether the sale makes sense you’ll need an accurate assessment of value of the farm you’re selling, the liabilities that have to be paid off to convey clear title, and the costs of sale. Knowing the value will give you a good sense for how to price the farm, what offers to take and whether the liabilities and sale costs will net enough to accomplish your goals. We’ve had clients who didn’t have a solid understanding of their farm’s value reject good offers in the hope of getting more, and ending up selling for much less. Similarly, not understanding the farm’s value and the costs against it can lead to realizing you sold more or less land than was necessary to accomplish your goals. On the flip side, as a potential buyer, will the infrastructure be adequate for what you want to do, or will it require improvements/additions/subtractions? Is the land enrolled in the Conservation Reserve Program and will you be locked into that agreement for years to come? Under CRP rules, you are limited in what you can do with the land. If you plan to raise livestock on the farm, does it come with an approved manure or nutrient management plan or will it need one? That can add another wrinkle. Ultimately, will the farm make enough money to justify the purchase when you factor in the other necessary costs and expenses? Just because you have money to spend and want to expand your operation doesn’t mean this farm, at this price, fits well with your plans to optimize your operation. Cash In, or Cash Out? An important consideration for a buyer is how much money they will need to free up to purchase a farm. If you’re using cash reserves will you have enough cushion left if an unexpected expense comes along? If you’re borrowing money will your post-purchase cash flows support the increased payments, especially if the loan terms (e.g. interest rate) aren’t fixed? These considerations all factor into whether it makes sense to buy the farm. If you buy too much and it works, you look smart. But if it doesn’t work you may find yourself in a different industry! Finally, talk with other farmers in the area, especially if you aren’t local. What market values are they seeing? Are farms in the area turning profits or just barely getting by? Local farmers can provide valuable insights to both prospective buyers and sellers. Taxes, too, are an important consideration – so important that we’re dedicating next month’s blog post to them. Look Before You Leap Farms traditionally are good investments, and the agricultural industry is better off when farms are owned by their operators. Farm buyers and sellers often spend a lot of time working through the whats and hows of farm sales without taking the time to consider the essential preliminary question: why? Take time to work through the whys before you buy or sell so you can make sure the transaction helps you achieve your goals instead of dragging you down Our expert team stands ready to help you properly analyze the “why,” and then work through the “what” and “how.” Contact us today. For part two, “Selling a farm: capital idea or capital gains tax?” see here. At Ag & Business Legal Strategies, we want our clients to be honest with themselves and have a solid business plan. Our attorneys and financial strategist will help clients create and execute a business plan and, if necessary, assist with the legal, tax, and practical aspects of debt restructuring or bankruptcy. Be proactive and anticipate problems instead of reactive to problems that have already arisen. Connect with someone you can trust today, not tomorrow.
Waiting to Act Only Exacerbates Financial Problems
Farmer spouses who keep the operation’s books might not be spending long hours in the field or barn, but the time they devote to the financials can just as easily make or break the family business. The spouse manager must be proactive should they see expenses outpacing income. Debt can accumulate rapidly and could, if not addressed promptly, lead to severe financial problems, including bankruptcy and even loss of the farm. Knowing financial crisis warning signs is an essential skill every spouse manager must possess. Of course, this is easier said than done. Accounting challenges Some spouse managers aren’t able to devote the time it takes to thoroughly scrutinize the farm’s budget and bank statements because they have second jobs or assist their farm spouses with the physical farm labor. They also might have limited accounting training and find it difficult to think beyond the next month’s bills. Oftentimes, these time-stretched spouse managers seek a short-term solution to a long-term debt problem. Instead of thinking, “What is my long-term plan to pay off this debt?” they are thinking, “How can we get next year’s crop in the ground? How can we just get by?” At Ag & Business Legal Strategies, we’ve seen a lot of cases where these short-term solutions involve working with lenders who charge high interest rates. The farmers get the money they need now, but the repayment terms are horrendous, leading to even greater financial stress. Resorting to high-interest rate loans is a tell-tale sign that creditors label you as a bad credit risk. In contrast, a good credit rating is a positive sign of financial health. Resorting to expensive financing is one of the warning signs of a financial crisis. Financial crisis warning signs How can a spouse manager know when their farm is approaching a financial crisis? First, look at the farm’s financial statements for the last five years. If you don’t have financial statements, that’s a financial crisis warning sign—how can you know how your farm is doing financially if you don’t even have the information? If you see negative cash flows for three of those years, that’s a financial crisis warning sign. If you see consistent positive cash flows but current liabilities are at or exceeding them, that’s a financial crisis warning sign too. Second, review your tax returns. If you owe taxes you’ll need to take swift action to work out a payment plan. Not being able to pay your taxes is a financial crisis warning sign, and not getting your taxes filed is a red flashing financial crisis warning sign. Finally, are you rolling over vendor financing or input loans for next year, getting cash advances from questionable lenders, or selling or pawning items to get through? These are all financial crisis warning signs too. Many farmers think that if they’ve got money in the bank they’ve had a good year. If that’s your only metric for financial stability, you’re not looking closely enough at your overall financial picture and you may be missing financial crisis warning signs. From bad to worse If farm debt is not dealt with in a timely manner and becomes a financial crisis the consequences can range from bad to catastrophic. First comes default interest. Suddenly your 6% bank loan becomes an 18% interest loan, and your already-too-tight cash flow breaks. Next comes legal action. Creditors will sue to collect from you or seize their collateral, like your crop and machinery. Many banks require their borrowers to maintain bank accounts with them, and if you get behind with them they can seize the money in the bank account, money dedicated to pay your mortgage, go on a vacation, or put food on your family’s table. Finally, once the lawsuits start creditors get judgments against you. That means even creditors that didn’t have liens on your land can get them. Creditors with judgments can then foreclose on the land and the farm can be lost. The time to act is now If a spouse manager spots financial difficulties they need to have a conversation with the farmer spouse sooner rather than later. While these can be tough conversations to have, they are essential to the farm’s continued health. From there, getting professional advice is key. It’s important to know where help and resources are available, including the Iowa State Extension and Ag & Business Legal Strategies. Don’t rely on your banker—their job is to take care of the bank, not to ensure your farm survives and thrives. Once both spouses know and agree a financial crisis is looming the first step is to consider your assets and farm practices. Do you need to sell the livestock? Do you need to downsize the equipment line because you are farming hundreds of acres and not thousands like before? What do you need to do to bring your balance sheet into line? Do you need to take or defend legal actions—filing lawsuits, defending lawsuits, filing bankruptcy—to ensure your farm’s continued survival? Ag & Business Legal Strategies can help you with this analysis. Once you’ve completed this analysis, you, with your advisors’ help, will create a plan to address the impending financial crisis and execute that plan. The two most important things to remember are to act early and not panic. The longer you wait to ask for help and act the bigger the problems get, and the options for solving them get smaller. Waiting won’t make financial problems go away. The good news is that there is usually a way out, and panic is unnecessary. Joe, Ag & Business Legal Strategies’ founder, took farmers through bankruptcy in the ’80s who are thriving today because of it. Act early and don’t let panic freeze you up or drive you to make rash decisions. If your herd came down with a disease you’d call a vet early; if weeds appeared in your crop you’d call a chemical supplier at the first sign. If you see financial crisis warning signs in your farm call the experts at Ag & Business
Death and Taxes is How We Lose It: The Importance of Succession Planning for American Agriculture
The hit TV show “Yellowstone” has achieved popularity with agricultural and non-agricultural audiences alike. Along with dramatized glimpses of ranching life, it also provides nuggets of truth with real world application. In a recent episode, while facilitating the sale of a family farm where one sibling couldn’t afford to buy the other out to retain the ranch, a real estate agent simply stated “Horses and cattle may be how the West was won, but death and taxes is how we’re gonna lose it.” Though that is certainly an oversimplification, the fact remains that failing to plan for the transition of a farm or ranch to future generations, and the tax consequences of those transfers, can result in the forced sale of some or all of the operation, many times to someone outside the agriculture field. Making a plan for the future can be intimidating, as it involves confronting mortality and making business decisions intertwined with family dynamics. Fortunately, there are steps that producers can take and resources available to make the process less overwhelming. Step 1 – Know What Makes Up a Succession Plan A common misconception is that succession planning is just a different term for estate planning. In reality, estate planning is just a portion of the process that works alongside a comprehensive plan to move the operation from one generation to the next, including the transition of decision-making power and the management and work responsibilities of the operation. In order to facilitate a successful shift, a succession plan typically includes steps that develop the next generation’s knowledge and participation in the operation, making it important to begin planning as soon as there is an indication that the next generation is interested in taking over when the current generation is ready. A thorough plan will consider the strengths and weaknesses of each of the parties to the transition, goals for the operation’s future, and potential threats or obstacles to the operation’s success. The key ingredient for a succession plan is detail, as it reduces the risk of misunderstanding, so the more that can be put in writing, the better. Step 2 – Know the Specifics of Your Operation Familiarity with one’s operation includes both quantitative and qualitative aspects. It is important for everyone involved to know the status of the operation’s finances and resources. This allows the feasibility of future operations to be assessed and also provides clarity for the successor about the situation into which they will be stepping. An accurate inventory of all resources, including tangible assets, support services, and people willing to assist is important information to flesh out the assessment. State extension programs can provide assistance in analyzing these values to gain an even better long-range picture and develop a financial plan. The qualitative specifics are more individually based and require some introspection and honesty from the parties. Each person involved in the transition should work to clearly identify their own wants and needs for the operation before sharing that information with other family members. In doing so, they will likely avoid some of the difficulty that may come from trying to voice opinions about the future of the operation and wanting to avoid “stepping on toes.” Individuals should also be aware of the strengths and weaknesses they bring to the transition and whether those characteristics lend themselves to continuing the same operation procedures or whether a change is in order. Once those individual visions and assessments are complete, all stakeholders should work together to create a central vision statement around which the succession plan will be formed. Step 3 – Formulate a Plan Once the broader vision statement is established, focus can shift to creating more specific objectives and goals that achieve that vision, while factoring in the inventory of resources available. Feasibility, attainability, and timeliness are necessary considerations when forming these goals and objectives and must remain a priority throughout the planning process. A business plan incorporates all of the stakeholder-established goals and objectives into one comprehensive plan that shows forethought and reliability to both internal clients, like family members and employees, and external clients, like lenders, investors, and partners. It should lay out the management structure of the operation, as well as the legal and financial structure of the business. Here again, state extension programs can provide resources to help develop an agricultural business plan, and the assistance of a skilled attorney can be invaluable. Once a business plan is nailed down, the focus can finally shift to estate planning and retirement planning. The chosen legal structure and financial structure of the business can affect the transferability of assets, distribution of income, and how the income and estate is taxed. The laws that govern these things are ever-changing, so here again, a skilled attorney is worth their weight in gold to not only establish initial positions that are favorable to the stakeholders but also to adapt the plan to changing laws to make sure that the succession plan continues to accomplish the intended outcomes. Step 4 – Implement the Plan Finally, a timeline must be established for implementing the changes laid out in the succession plan. Though the retiring generation may be reluctant to take a step back and let the incoming generation make decisions and learn from the outcome, whether good or bad, allowing them to do so while there is still time to teach may be the most effective option. If incoming generations remain mindful and respectful of the experiences and vast knowledge of the retiring generation, the operation can become even more competitive and successful while the transition is still underway. Hard Work Pays Off Ultimately, succession plans can be as unique as the operations they direct. In fact, the more individually tailored they are, the more successful they are likely to be because the stake-holders invested significant effort in creating a plan to accomplish their collective vision. Producers investing the time and effort to create effective succession plans will help to keep American agriculture from
Choice of Business Entity for Farmers
The choice of business entity for a farm is an important decision that can either protect farm owners and their families from the risks inherent in the farming enterprise or expose them to those risks. Farmers employ various forms of business entity, and the choice varies greatly between types of farms and their sizes. Many are operated as sole proprietorships and general partnerships, but these formations pose great risks to their owners. However, Iowa laws restricting corporate farm ownership makes it harder for corporate entities (corporations, LLCs, limited partnerships, etc.) to own or lease farmland. What’s a farmer to do? Thankfully, many of those restrictions can be avoided with appropriate legal advice, and in almost all cases farmers should be able to take advantage of the benefits of corporate entities in running their farming operations. Sole Proprietorships and General Partnerships Sole proprietorships are the simplest business entity to “create.” They consist of one owner, and it is the default business entity if a farmer does not file to create another kind. In fact, you automatically become a sole proprietor if you own your own farm and are not on another person’s payroll. There may be some licenses and permits required such as a tax certificate or a filing required for a farmer wanting to name their business something different than their own name, but generally, a sole proprietorship has fewer hoops to jump through to start business. Unfortunately, this simplicity comes at a cost, as there are significant risks associated with operating as a sole proprietorship. As sole proprietor, your personal assets are not protected from liabilities deriving from business operations. Because the farmer, as a sole proprietor, is not legally distinct from the business, the assets of the farmer can be used to cover any liabilities and debts. While exemptions will protect some assets, if a farm starts facing financial issues, there is a significant threat that creditors will come after the farmer’s personal assets. These dangers heighten under a general partnership. Under a general partnership, the personal assets of all partners are subject to liability. Moreover, the actions of a partner can create liability for another partner, and every partner can enter into business arrangements that are binding on the whole partnership. Not only is each partner subject to liability as an individual, but each partner can be held fully responsible for the full amount of the partnership’s debt. This creates a situation where one of the partners may be compelled to sue another partner to recover their share of the debt. The partnership can alleviate some of these potential issues by creating a detailed partnership agreement outlining the terms of the relationship, but even with such a written agreement, an alternative business structure would provide more protection. Moreover, a general partnership can be formed unintentionally—all it takes is two people going into business together seeking a profit. If one such partner doesn’t realize they’ve entered into a general partnership, they could face unexpected liability for another partner’s conduct on behalf of the partnership. “One advantage of a general partnership is that the business may be able to circumvent payment limitations under certain federal farm programs, since each general partner may qualify to receive payments up to the limit instead of only being eligible for one payment as an entity. However, this doesn’t mean it’s necessary to accept the personal debt risk of a general partnership to obtain this benefit; limited liability entities can serve as general partners, giving the best of both worlds—eligibility for multiple federal farm program payments plus limited liability to protect your assets.” Limited Liability Company The LLC combines the flexibility and favorable tax treatment of a sole proprietorship with the asset protection of a corporation. Understandably, it is a popular choice for a business entity. Farming, like any business, can be unpredictable, and ventures often fail. The LLC provides farmers with greater protection. If the creditors come after the LLC, they can only get LLC assets. This is because when an LLC is created, the LLC becomes its own distinct legal entity. This separation between the owners and the LLC protects a farmer’s personal assets because the farm’s assets are distinct from the farmer’s. Put simply, the risk of the farmer is limited to the amount the farmer invests in the LLC but not more than that. Because the LLC is a separate entity, the farmer must actually separate the assets of the farm from personal assets. In practice, this requires that farmers create separate bank accounts and work to capitalize their farm. LLCs also give farmers more flexibility when operating their business. LLCs offer broad discretion to owners when deciding who has control in making big decisions for the business. For example, if multiple people are farming together, voting rights in the LLC could be based on an farmers’ percentage of ownership, or each farmer could have one vote regardless of share. Additionally, LLCs do not require that farmers divide profits and losses in proportion with the share of the business owned by each farmer. In a general partnership, if there are two equal partners, then profits and losses would be split equally between them. However, with LLCs, this arrangement can be made however the owners choose. Lastly, LLCs lack the formalities of other business entities like corporations. LLCs do not require positions such as President or Treasurer (though an LLC’s members are free to create such positions), and LLCs do not have to establish annual meetings with elected members. Many farms are owned by a single farmer or very few farmers, so the formalities can be more of an inconvenience than useful guidelines for business governance. Despite the advantages of an LLC, there is a risk of automatic dissolution of an LLC if the LLC does not report its filings on time or even if there is some change in the business’s structure as the result of a death of an owner or a merger. This does not mean that
Chapter 12 Bankruptcy: Is It Right for Me?
The decision to file bankruptcy is not one that is made lightly. By the time the petition is filed, there have likely been many difficult conversations and strategy sessions to make sure that the entity or individual is making the best move for the future. An essential part of that strategy involves considering the goals of the debtor and deciding whether to liquidate assets to pay off debts or to reorganize and repay debt with the hope of continuing to operate their farm or business after the bankruptcy. For farmers* looking to continue operating after a bankruptcy discharge is granted, Chapter 12 bankruptcy is an enticing option, as it offers unique benefits to those who qualify, but it is important to evaluate whether it is really the best choice. Who Qualifies? Chapter 12 bankruptcy was created to specifically apply to “family farmers” with regular annual income. By requiring that the debtor have regular income, Chapter 12 lends itself to debtors that are better able to make plan payments while figuring out how to successfully continue farming. To meet the definition of family farmer, individuals and business organizations must show that they meet specific criteria laid out in the Bankruptcy Code. Individuals must: (1) be engaged in a farming operation; (2) be carrying less than $11,097,350 in debt; (3) have at least 50 percent of that debt from a farming operation that they own and operate; and (4) have more than 50 percent of the individual’s (or the individual’s and the individual’s spouse’s) gross income come from farming in the tax year directly before filing or each of the second and third years preceding the tax year in which the bankruptcy case is filed.[i] Bankruptcy courts have indicated some flexibility with what constitutes engagement in a farming operation,[ii] but that is the only factor that allows for much flexibility of interpretation. Corporations or partnerships may also file “farm bankruptcy,” but they must meet even more criteria to avail themselves to Chapter 12’s protections. In addition to the regular income requirement, on the date of filing, a corporation or partnership must: (1) have more than 50 percent of the outstanding stock or equity held by one family or by one family and its relatives; (2) have the majority owner family conducting the farming; (3) have more than 80 percent of the corporation’s or partnership’s assets be related to the farming operation; (4) have aggregate debts of no more than $11,097,350; (5) at least 50 percent of the debt must be attributable to the farming operation; and (6) the corporation must not issue publicly traded stock.[iii] Once debtors clear the eligibility hurdle, they should assess whether the benefits of Chapter 12 bankruptcy make it the best strategic choice. Benefits Family farmers that want to continue their operation while repaying some or all of their debts may find the unique provisions of Chapter 12 bankruptcy extremely helpful in achieving that goal. Because farm income is inherently seasonal, farm debtors may struggle to make consistent monthly payments as required by other forms of bankruptcy. Chapter 12 allows the reorganization plan to provide for payments scheduled around harvest and typical commodity marketing times, and that plan may be confirmed even over the objections of creditors, so long as the court deems it acceptable. Farm debtors may also find value in Chapter 12’s allowance for the sale of farmland or farm equipment free and clear of creditor’s interest where other types of bankruptcy severely limit that sale. Selling that land and equipment inevitably creates tax consequences that must be handled by the bankruptcy estate. Where Chapter 11 requires that the capital gains tax is paid in full as a priority claim, Chapter 12 pushes that capital gains tax liability to the back of the priority line where it may be discharged, either in full or in part, after completion of the plan.[iv] Being able to “right size” the operation without incurring a crippling tax bill increases the likelihood that a debtor will be able to successfully complete the reorganization plan, receive a discharge of the remaining debts, and continue farming after completion of the bankruptcy. Finally, Chapter 12 debtors have the privilege to use “cramdown” on any secured debt. Cramdown makes it so that creditors only receive the present market value of the property used to secure the debt rather than the full amount owed. Debtors who are currently “upside down” on assets can find significant relief in this provision. Reality Check Even if a debtor qualifies for Chapter 12 bankruptcy and the benefits would serve them well, it still may not be the best option for relief. The unfortunate reality is that from 2000 to 2015, less than half of Chapter 12 debtors were able to successfully complete all plan payments and receive a discharge of the remaining debts.[v] A debtor whose current cash-flow left them unable to make timely payment of their debts, necessitating a bankruptcy filing, needs to seriously consider whether they can realistically make plan payments while continuing to run their operation as they have been. Though the provisions of Chapter 12 allow for downsizing or changing the type of farming operation, careful consideration should be given to whether attempting to restructure is just postponing the inevitable liquidation of the assets. Having a team of knowledgeable and trustworthy advisors, both personal and professional, is invaluable when making such a pivotal decision. By considering the eligibility requirements, the benefits offered, and the feasibility of a debt reorganization plan, debtors can make an informed decision on whether Chapter 12 bankruptcy is right for them. *Note: Chapter 12 bankruptcy also applies to family fishermen, but this post only addresses farm bankruptcy. This article was updated to reflect that as of April 1, 2022, the chapter 12 bankruptcy debt limit was increased from $10,000,000 to $11,097,350. Sources Thriving After a Farm Bankruptcy Fact Sheet, https://28xeuf2otxva18q7lx1uemec-wpengine.netdna-ssl.com/wp-content/uploads/assets/articles/bankruptcy/Thriving-after-a-farm-bankruptcy.pdf https://www.calt.iastate.edu/article/review-farm-bankruptcy [i] 11 U.S.C. § 101(18)(A) [ii] In re Mongeau, No. 21-40055, 2021 Bankr. LEXIS 2923 (Bankr. D. Kan. Oct. 22, 2021) [iii] 11 U.S.C. § 101(18)(B) [iv] McEowen, Roger, Farm
What Every Bankruptcy Lawyer Must Know About Chapter 12
Shareholder Joe Peiffer and associate Austin Peiffer recently co-authored an article on chapter 12 bankruptcy with Vermont bankruptcy trustee Jan Sensenich. It was published in the May 2021 edition of the American Bankruptcy Institute‘s ABI Journal. **As of April 1, 2022, the chapter 12 bankruptcy debt limit was raised to $11,097,350.
Thirty-Three Years of Asking, “Are We There Yet?”
The Commercial Law League of America recently published Joe Peiffer’s article “Thirty-Three Years of Asking “Are We There Yet?”” as one of the title articles in the summer edition of their publication, Commercial Law World. Click the image below to read the article. **As of April 1, 2022 the chapter 12 bankruptcy debt limit has increased to $11,097,350.