Following a positive trend over the last few years, 2018 saw some favorable changes for New York State farmers. Three important items for farmers and their advisers to keep in mind this winter are the food pantry credit, the property abatement and exemption changes, and the ways that changes made by the Tax Cuts and Jobs Act to section 1031 exchanges could jeopardize the farmers’ school tax credit (FSTC).
I. Food Pantry Credit
Starting in 2018, a farmer who makes a qualified donation1 to an eligible food pantry2 will receive a tax credit for the donation. As always with New York, the definition of farmer is important. A farmer eligible for the credit is an individual or corporate taxpayer that has at least two-thirds of excess federal gross income from farming. In other words, two-thirds of income (after accounting for a $30,000 cushion) must come from farming. Payments from the State Farmland Protection Program will count. The amount of the credit is 25 percent of the fair market value3 of the taxpayer’s qualified donations made to an eligible food pantry, up to $5,000.
Wayne’s only source of income for 2018 is $100,000 schedule F profit from his orchard. Because Wayne’s income is entirely from farming, he qualifies as an eligible farmer. If Wayne donates $10,000 of apples to an eligible food pantry, he will receive a refundable credit of $2,500.
B. Entity Example
In addition to running his own orchard, in 2018 Wayne joins Crop Farm LLC as an equal 50 percent partner. Crop Farm donates $40,000 of eligible food to an eligible pantry. Because the credit has a $5,000 cap at the entity level,4 Wayne’s share of the credit — 50 percent of the $5,000 maximum, or $2,500 — is reported on his personal tax return.
Note again the definition of the term “eligible farmer.” The definition is taken from the FSTC section,5 and is the default for legislation enacting new farm credits. The definition does not include some activities that the state considers in the definition of farming as it relates to the FSTC such as maple syrup and cider production, Christmas tree cultivation, commercial horse boarding, and the sale of wine or cider from farm wineries and cideries.
That same issue was discussed in a previous column as it pertained to the farm workforce retention credit.6 In that credit, as here, the definition has been limited. For an eligible farmer to claim the credit, the farmer must retain a receipt7 from the eligible food pantry that shows the name of the pantry and the date, location, and a reasonably detailed description of the qualified donation.8 A farmer who makes such a donation must reduce his or her New York state itemized deductions for the year by “any charitable contribution deduction allowed . . . with respect to such donations.”9
II. Changes to Agricultural Property Tax Assessments
New York farmers need to be aware of several changes to property tax assessments. The first deals with hopyards. A. 10097 provides for lower property taxes for land used to produce hops.10 The legislation amended section 301 of New York’s agriculture and markets law so that land used in agricultural production includes:
land of not less than seven acres used as a single operation for the production for sale of hops when such land is used solely for the purpose of planting a new hopyard and when such land is also owned or rented by a newly established farm operation in its first, second, third or fourth year of agricultural production.
In that case, the hopyard will qualify for lower property taxes because, “the Agricultural Districts Law allows reduced property tax bills for land in agricultural production by limiting the property tax assessment of such land to its prescribed agricultural assessment value.”11 Further, the new changes regarding hopyards brings them in line with orchards and vineyards in another way in that there is a limited tax exemption for replanting or expanding hopyards.12
III. Property Exemption
New York recently extended through 2029 the partial tax exemption for farm buildings and structures that are essential to for-profit agricultural or horticultural operations on at least five acres.13 Under Real Property Tax Law section 483, essential farming buildings (barns, greenhouses, and parlors) are excluded from tax assessment for 10 years to the extent of any increase in value attributed to their construction or reconstruction. Generally, those buildings must be used for raising and producing for sale agricultural and horticultural commodities. The exemption does not cover buildings for processing14 and retailing15 commodities except for maple syrup, honey, and beeswax. Also, buildings for employees (but not family) qualify, as do arenas used in commercial horse boarding operations.
Farmers should not confuse this exemption with the one for silos, feed grain storage bins, commodity sheds, manure storage, handling and treatment facilities, or bulk tanks and coolers used to hold milk awaiting shipment to market, because those types of structures already are exempt from taxation via Form RP-483-a.
IV. Section 1031 Exchanges and the FSTC
The TCJA eliminated IRC section 1031 exchanges for personal property. Capital-intensive businesses such as farming will now have more taxable events to report, but also more basis in the acquired assets. The inclusion of income from equipment sales will result in more non-farm income for farmers.
In 2017 farmer Walter wanted to buy a new $100,000 tractor. Walter swapped out his 2-year-old tractor to get a $40,000 trade-in allowance. As a result, Walter was required to come up with $60,000 to complete the transaction. Walter used section 179 when he purchased the 2-year-old tractor to write off the entire $40,000 and thus the adjusted tax basis is zero. Because of the section 1031 exchange, Walter paid no tax on the trade-in and has basis in the new tractor of $60,000. That same scenario under the TCJA would trigger $40,000 of taxable income on the trade-in because it is now no different from a sale. However, Walter would have $100,000 of basis in the new tractor. This may not seem like a big deal because IRC section 179 and bonus depreciation can be used to write off the ordinary gain on the trade-in. However, to do that, the farmer is basically writing off an asset to reduce self-employment income in many cases to offset non-self-employment income (assets reported on federal Form 4797). This could affect retirement contribution limits. If Walter used section 179 there would have been no New York investment tax credit on the traded-in tractor and therefore no recapture. However, if bonus depreciation were used, there would have been recapture required on the ITC taken.
One of the bigger issues for some New York farmers is the potential phaseout of FSTC eligibility because of the 1031 exchange changes. That is because for New York purposes, equipment sales do not constitute farm income.16 As a result, taxpayers with enough trade-ins could miss valuable tax credits they have historically received. This is particularly true for smaller farmers who have perhaps put off purchasing new equipment because of the poor conditions of the overall agricultural economy.
Sally has been farming a small, organic farm grossing $200,000 annually. She has delayed equipment purchases but finally traded in a fully depreciated tractor worth $125,000 for a new $150,000 tractor. The $125,000 gain would kick Sally out of FSTC eligibility for the year (assuming the three-year averaging would not save her).17 But wait! Isn’t there a $30,000 cushion that would allow her to qualify as a farmer because $200,000 of gross farm income out of $295,000 (the sum of the $200,000 gross farm income + $125,000 gain on the trade-in minus the $30,000 cushion) would be 67 percent for Sally? However, the description of income permitted to be reduced by the $30,000 defines excess federal gross income as “the amount of federal gross income from all sources for the taxable year reduced by the sum (not to exceed thirty thousand dollars) of those items included in federal gross income which consist of (i) earned income, (ii) pension payments, including social security payments, (iii) interest, and (iv) dividends.”18
So the gain on the sale of business assets are not included in the defined items that is permitted to be reduced by the $30,000 cushion. For example, if Sally had $200,000 of farm income and $125,000 of personal dividends, then her excess federal gross income would be $200,000 + 125,000 - $30,000, or $295,000. In that case, her $200,000 farm income out of $295,000 excess federal gross income is at least two-thirds. Thus she would qualify. This is a potential double whammy for those teetering on the edge of eligibility.
Overall, 2018 brought New York farmers some good legislative news. There are now incentives for food donations and hops growing and a renewed exemption from higher property taxes because of farm building construction. We hope 2019 continues the recent trend of positive legislative change for farmers in New York.
1 “The term ‘qualified donation’ means a donation of any apparently wholesome food, as defined in section 170(e)(3)(C)(vi) of the internal revenue code, grown or produced within this state, by an eligible farmer to an eligible food pantry.” N.Y. Tax Law section 606(n-2)(3).
2 “The term ‘eligible food pantry’ means any food pantry, food bank, or other emergency food program operating within this state that has qualified for tax exemption under section 501(c)(3) of the internal revenue code.” N.Y. Tax Law section 606(n-2)(4).
3 The FMV of donated food is calculated under the standards in IRC section 170(e)(3)(C)(v). N.Y. Tax Law section 606(n-2)(5). In other words, what price a farmer would receive for the same or similar item if sold instead. See New York State Department of Tax and Finance, Instructions for Form IT-649, “Farm Donations to Food Pantries Credit.”
4 $40,000 x 0.25 = a $10,000 credit, which is $5,000 over the maximum permitted.
5 The only part of the definition that was not taken verbatim from the section was the portion dealing with earned income. However, the TSB-M-18(4)C and the instructions both mention it.
6 Dario Arezzo, “Navigating the Definition of Farming for New York Farm Wineries,” State Tax Notes, June 11, 2018, p. 1067.
7 A letter or other written communication from the food pantry. N.Y. Tax Law section 606(n-2)(7).
8 N.Y. Tax Law section 606(n-2)(6).
9 N.Y. Tax Law section 615(n)(9). Regarding the federal charitable contribution limitations and Notice 2018-54, much has been written on this issue and we will continue to see how that plays out.
10 A. 10097; Chapter 192 (N.Y. 2018).
11 New York State Department of Tax and Finance, “Agricultural Assessment Program: Overview” (undated).
12 This exemption is for the first six years. Further, eligible land “shall not in any one year exceed twenty percent of the total acreage of such . . . hopyard . . . or twenty percent of the total acreage of such . . . hopyard eligible for the agricultural assessment.” N.Y. AGM Law section 301(4)(n).
13 New York Governor, “Property Tax Exemption on Farm Buildings Extended 10 Years” (Dec. 3, 2018).
14 “A building is used for processing whenever the principal activity occurring therein is the preparation of farm commodities for market as distinguished from the raising, producing or storing of such farm commodities. A building is not disqualified if processing activities are merely incidental to exempt activities.” N.Y. RPTL section 483.
15 “A building or structure (or portion thereof) is used for retail merchandising when it is used for the sale of a farm commodity to the ultimate customer.” Id.
16 See New York State Department of Taxation and Finance, Questions and Answers on New York State’s Farmers’ School Tax Credit.
17 $200,000 of farming income out of $325,000 of total income would yield only 61.5 percent gross farming income. “In determining such income eligibility, a taxpayer may, for any taxable year, use the average of such federal gross income from farming for that taxable year and such income for the two consecutive taxable years immediately preceding such taxable year.” N.Y. Tax Law section 606(n)(2).