Small Business Taxes & Management^TM--Copyright 2008, A/N Group, Inc.

This Act includes the Heartland, Habitat, Harvest, and Horticulture Act of 2008 as Title XV of the overall Act. The Heartland, Habitat, Harvest, and Horticulture Act of 2008 contains nontax and tax provisions of particular interest to farmers. The discussion below includes tax provisions of more general interest.

Exclusion of conservation reserve program payments from SECA. The act excludes conservation reserve program payments from self-employment income for purposes of the SECA (self-employment) tax in the case of individuals who are receiving Social Security retirement or disability benefits. The treatment of conservation reserve program payments received by other taxpayers is not changed. Effective for payments made after December 31, 2007.

Special rule for contributions of capital gain real property for conservation purposes. The Act makes permanent the 30-percent contribution base limitation on contributions of capital gain property by individuals does not apply to qualified conservation contributions. Instead, individuals may deduct the fair market value of any qualified conservation contribution to an organization described in Section 170(b)(1)(A) to the extent of the excess of 50 percent of the contribution base over the amount of all other allowable charitable contributions. Contributions that exceed the 50-percent limit may be carried forward 15 years. For farmers and ranchers the limit is 100 percent of the contribution base.

Temporary reduction in corporate tax rate for qualified timber gain. The Act provides a 15-percent alternative tax rate for corporations on the portion of a corporation's taxable income that consists of qualified timber gain (or, if less, the net capital gain) for a taxable year. The alternative 15-percent tax rate applies to both the regular tax and the alternative minimum tax. Qualified timber gain means the net gain described in Section 631(a) and (b) for the taxable year, determined by taking into account only trees held more than 15 years.

Credit for production of cellulosic biofuel. The new law adds a new component to Section 40, the "cellulosic biofuel producer credit." This credit is a nonrefundable income tax credit for each gallon of qualified cellulosic fuel production of the producer for the taxable year. The amount of the credit per gallon is $1.01, except in the case of cellulosic biofuel that is alcohol.

Ethanol credit. The Act reduces the 51-cent-per-gallon incentive for ethanol to 45-cents-per-gallon for 2009.

Qualified small issue bonds for farming. The new law increases the maximum amount of qualified small issue bond proceeds available to first-time farmers to $450,000 and indexes this amount for inflation. The provision also eliminates the fair market value test from the definition of substantial farmland.

Allowance of Sec. 1031 exchange involving certain mutual ditch, reservoir, etc. stock. You can avoid recognizing a capital gain on the disposition of an asset by making a like-kind exchange. However, In general, section 1031 does not apply to any exchange of stock in trade or other property held primarily for sale; stocks, bonds or notes; other securities or evidences of indebtedness or interest; interests in a partnership; certificates of trust or beneficial interests; or choses in action.

The new law provides that the general exclusion from Section 1031 treatment for stocks shall not apply to shares in a mutual ditch, reservoir, or irrigation company, if at the time of the exchange: (1) the company is an organization described in Section 501(c)(12)(A) (determined without regard to the percentage of its income that is collected from its members for the purpose of meeting losses and expenses); and (2) the shares in the company have been recognized by the highest court of the State in which the company was organized or by applicable State statute as constituting or representing real property or an interest in real property.

Three-year depreciation for race horses. The new law provides a three-year recovery period for any race horse that is two years old or younger at the time that it is placed in service after December 31, 2008 and before January 1, 2014.

Kansas disaster zone. The new law provides a number of special relief measures including bonus depreciation, increased expensing option under Sec. 179, longer replacement period for involuntarily converted property, etc. for taxpayers affected by severe storms and tornados beginning May 4, 2007 in Kiowa County, Kansas and the surrounding area.

Limit on farming losses. The Act limits the farming loss of a taxpayer, other than a C corporation, for any taxable year in which the taxpayer has received Agricultural Program Payments or CCC loans to the greater of (1) $300,000 ($150,000 in the case of a married person filing a separate return), or (2) the taxpayer's total net farm income for the prior five taxable years. For purposes of the provision, applicable subsidies are (1) any direct or counter-cyclical payments under title I of the Food, Conservation, and Energy Act of 2008 (or any payment elected in lieu of any such payment), or (2) any CCC loan. Total net farm income is an aggregation of all income and loss from farming businesses for the prior five taxable years.

Increase and index in dollar thresholds of optional method of computing net earnings from self-employment. Generally, tax under the Self-Employment Contributions Act (SECA) is imposed on the self-employment income of an individual. SECA tax has two components. Under the old-age, survivors, and disability insurance component, the rate of tax is 12.40 percent on self-employment income up to the Social Security wage base ($97,500 for 2007). Under the hospital insurance component, the rate is 2.90 percent of all self-employment income (without regard to the Social Security wage base). The new law modifies the farm optional method so that electing taxpayers may be eligible to secure four credits of Social Security benefit coverage each taxable year by increasing and indexing the thresholds. The provision makes a similar modification to the nonfarm optional method.

--Last Update 06/20/08