Tax Pointers for Farmers and 

 Landowners in 1 994 



P. Geoffrey Allen 



Department of Resource Economics, University of Massachusetts 



Tax advice given below is intended as general advice 

 and is believed to be correct. It does not substitute for a 

 detailed review of the circumstances of an individual tax- 

 payer by a professional tax practitioner For more details, 

 you and your tax adviser may wish to consult the sources 

 referenced in the square brackets [thus] (see footnote) . 



No new federal tax legislation was passed last year; 

 however, a number of provisions of the 1 993 Revenue Rec- 

 onciliation Act became effective on January 1, 1994. 



Health Insurance 



If you were a self-employed person in 1993 (or an S- 

 corporation shareholder) you were able to deduct (on line 

 26 of your 1993 Form 1040) 25% of your health insur- 

 ance premium. The bad news is that this provision ex- 

 pired on December 31, 1993 and is therefore not avail- 

 able for 1994. The good news is that Congress is expected 

 to extend the provision and will probably make it retroac- 

 tive. If so, you will need to file for a refund on Form 1 040X. 

 [I.R.C. §162(1)] 



100% Medical Writeoff? 



A number of tax advisers have been advertising a to- 

 tally legal way for a self-employed person to deduct 100% 

 of health insurance premiums. Basically, the taxpayer treats 

 his or her spouse as an employee entitled to health insur- 

 ance and purchases insurance for the employee that includes 

 health benefits for the spouse. There may be substantial 

 lax benefits, but the approach is not costless. The spouse 

 must be treated as a common law employee. As employer, 

 the sole proprietor now has to engage in all the paperwork 

 and actions associated with income tax withholdmg, de- 

 ductions for social security, etc. For a farmer who already 

 employs non-relatives, the additional paperwork would be 

 minimal. However, the health insurance may need to be 

 offered to all or most of the employees. The advice of a 

 professional tax planner is essential for anyone contem- 

 plating this approach. [I.R.C. §105] 



Charitable Donations 



Effective January 1, 1994, single charitable donations 

 of $250 or more may be deducted (on Schedule A) only if 

 the charity provides you with written substantiation, in- 



cluding a good-faith estimate of the value of any good or 

 service that you provided. If you donated money, you may 

 not rely solely on a cancelled check as substantiation. 



Separate payments to the same charity (e.g. by withhold- 

 ing from wages) will be treated as separate contributions, 

 even if they aggregate to more than $250. [IRS temporary 

 and proposed regulations T.D. 8544; IA-74-93 (published 

 May 27, 1994) relating to I.R.C. §170(0(8).] 



As an example of the donation of the development 

 rights on a tract of land, a taxpayer made a donation that 

 was a qualified conservation contribution and claimed a 

 deduction on his return of the value of the development 

 rights. The IRS disallowed the entire deduction. The 

 TaxCourt allowed the deduction and specified that the de- 

 ductible amount was to be determined by comparing the 

 before value and the after value of the property. The before 

 value was the purchase price. The after value was the net 

 income (the land was used as a duck hunting club) capital- 

 ized at 4% to get the fair value. [Schwab vs Commissioner, 

 67 TCM, TC. Memo 1994- 

 232, May 25, 1994] 



Depreciation Allowed or Allowable 



A recent Tax Court case confirmed what most taxpay- 

 ers know: according to § 1016(a) of the Internal Revenue 

 Code, the basis of property, when computing gain must be 

 reduced by the depreciation allowed or allowable. In the 

 court case, taxpayers owned rental property that was fore- 

 closed. They reduced their basis by the amount of depre- 

 ciation taken ($43,000) and claimed a loss of $20,500 on 

 the sale. The IRS determined that the allowable deprecia- 

 tion was $95,123 resulting in a taxable gain of $31,623. 

 [Perry M. and Janice S. Brock vs Commissioner, 67 TCM, 

 T.C. Memo 1994-177, April 20, 1994] 



Involuntary Sale of Land 



The owner of a farm who was forced to sell was al- 

 lowed to use the entire proceeds to purchase and improve 

 new property. He thus deferred the entire capital gain 



from the sale. As an example, the owner of an active tarm 

 .sold it to a city rather than have the land taken by eminent 

 domain. He bought other land and erected buildings on 

 the new property, similar to those that existed on the i)ld 

 farm. With involuntary conversion [I.R.C. §1033], gain can 



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Fruit Notes, Winter, 1995 



