USDA NASS has released the equivalent of college football’s pre-season poll, which is the August Crop Production report (released August 12). The Crop Production report provides an estimate of acreage, area harvested, yields, and production for the major row crops in the U.S. Additional crop production reports (polls) will be released in September, October, and November. The Annual Crop Production report (final poll) will be released in January.
For the states represented in the Southern Ag Today area, estimates for cotton yields garner a lot of attention. How accurate are these August estimates to actual yields? Table 1 shows the actual five-year average (2019 – 2023) annual cotton yield compared to the five-year average of the August yield projection.
Table 1. Annual Cotton yield vs. August estimates yields (5-year averages)
There is a range in the percent difference in the actual yields versus the August estimates. The actual five-year average ranges from 17.43 percent below the five-year estimated August yield (Florida) to just over 8 percent higher than the August estimate (Tennessee).
Like pre-season polls, the estimated yields can vary from the actual annual yield for numerous reasons. Wind and excess rain from tropical weather events cause the largest decline in yields from the August estimate to the actual yields. While we won’t know for several months what our actual yields are (or our favorite team’s record), the pre-season projections provide some insight.
Following recent droughts, hurricanes, or other natural disasters, many timber owners may wonder if they can deduct timber losses on their federal income tax returns. As with many tax questions, the answer is often, “It depends.” While it sounds unhelpful, it reflects the complexity of factors that can influence the eligibility for the tax deduction. Furthermore, even if the timber losses are deductible, they may be subject to different deduction rules regarding types of losses, ways to calculate the deduction, and limitations on the deductible losses. These also have implications for the forms used to claim the deductions and documents for record keeping.
This article focuses on the tax treatment of timber losses from natural disasters for federal income tax purposes. The rules for income tax deductions for yard trees differ from those for timber. We’ll cover that topic in a future article. As mentioned in a previous article in this series, the classification of your timber holding has important tax implications. Timber holding can generally be classified as one of the following three types: 1) for personal use or as a hobby (not-for-profit); 2) as an investment; or 3) for trade or use in a trade or business.
Natural disasters and types of timber losses
Not all natural disasters are treated the same when it comes to timber loss deductions on your federal income tax returns. Timber losses from natural disasters could be treated as casualty losses or noncasualty losses.
Casualty timber loss. If the timber loss is caused by natural disasters such as fire, storm, flood, hurricane, volcanic eruption, or earthquake, it could be treated as a casualty loss. For federal income tax purposes, a casualty is an identifiable event that is sudden, unexpected, and unusual. Suddenness is a key element, and it means the suddenness of the loss rather than the suddenness of the event itself (Rev. Rul. 87-59). Therefore, timber losses due to gradual deterioration are not considered casualty losses. For example, losses of timber following prolonged droughts (Rev. Rul. 90-61) or epidemic attacks of Southern Pine Beetles (SPB) are generally not considered casualty losses
Noncasualty timber losses. Noncasualty timber loss is the loss of timber due to an identifiable event that is unexpected and unusual but does not meet the suddenness requirement. The loss may result from a combination of factors. For example, timber losses from prolonged droughts or epidemic attacks of beetles (e.g., mountain pine beetles, SPB) could qualify as noncasualty losses for landowners holding timber in a trade or business or as an investment.
However, tree mortality caused by routine disease and normal levels of insect infestation is considered a cost of doing business and is not treated as either a casualty loss or a noncasualty loss. These losses are recoverable through depletion when the timber is sold or harvested.
Tax treatment of casualty timber losses vs. noncasualty timber losses
There are several tax advantages to timber casualty losses compared to noncasualty losses:
Deduction from ordinary income. Timber casualty losses are deducted from ordinary income, while timber noncasualty losses offset section 1231 gains first, which are taxed at the lower long-term capital gains rate.
Eligibility. Casualty loss deduction is available for all types of timber holdings, including timber for personal use (subject to the $100 reduction and 10% adjusted gross income rule and presidentially declared disaster area). In contrast, noncasualty loss deduction is only available for timber held in a trade or business or as an investment.
Loss estimation method. Timber casualty losses are estimated using a block approach (IRS, 2011). Deductible timber casualty loss is the lesser of (1) the adjusted timber basis or 2) the diminution in the fair market value of the timber block due to the casualty. In contrast, timber noncausality losses are estimated like a timber sale by multiplying the depletion unit by the quantity of timber destroyed. When the timber depletion block is large, and only a relatively smaller portion of it is damaged or destroyed, the deductible timber casualty loss could be greater than if the loss were considered noncasualty.
Specialprovisions for federally declared disaster areas. If the timber casualty loss results from a presidentially declared disaster, you can deduct the casualty loss in the current year or on an amended return for the previous year.
Landowners may experience significant timber losses due to various natural disasters. Federal income tax provisions are available to help landowners recoup some of the losses. However, the tax treatment of timber losses varies depending on the type of natural disaster and the classification of the timber holding. In most cases, the deductible timber losses may not fully reflect the actual economic losses. Affected landowners are encouraged to consult with a forester and tax advisor for advice specific to their situation.
References
IRS. 2011. Timber casualty loss audit techniques guide.
Resources:
Li, Y. 2019. Income tax deductions for hurricane-damaged timber losses. University of Georgia.
The internet is an essential part of daily life for many Americans. For farmers, it allows them to get up-to-date prices, discover available farm programs, or get information from places like Southern Ag Today. Agriculture is seeing many technological advances with tools such as precision agriculture and autonomy. Reliable access to the internet is increasingly necessary to take full advantage of these newer technologies. To that end, there have been several government programs initiated to provide more access to the internet across the U.S. The Rural Digital Opportunity Fund (RDOF) was announced in 2019 and is focused on improving internet access for rural Americans with $20.4 billion in funding in a ten-year period. The Broadband Equity, Access, and Deployment (BEAD) Program has provided $42.45 billion to increase high-speed internet access across all 50 states in the upcoming years. Every state now has a state broadband office that deals solely with improving internet access in their state. For example, Mississippi has the Office of Broadband Expansion and Accessibility of Mississippi (BEAM).
Internet access for producers has seen modest improvements from 2017 to 2022 based on U.S. Census data (Table 1; Figure 1). Across the U.S., the percentage of farm operations or operator residences with internet access increased from 75.4% in 2017 to 78.7% in 2022. While many of the southeastern states still lag behind the U.S. average, most of the states had significant increases in producers’ internet access over this time period. Of the 14 southeastern states examined, 10 had a higher percentage increase than the U.S. average. Arkansas had the highest increase of 8.3%, followed by Louisiana with an increase of 7.5%, and then Mississippi with an increase of 7.3%. Even so, there is still a surprisingly large number of producers, 21.3%, who do not have access to the internet. This is important for government agencies and universities to understand and make sure that the information they provide is available to all producers.
It should be noted that simply having access to the internet does not necessarily mean that the internet is reliable or has the speed to be effective for producers. For the measure described here, internet access can be obtained through 1) a Cellular data plan, 2) Satellite Internet, 3) Broadband (high-speed) Internet service such as cable, fiber optic, or DSL service, or 4) Dial-up Internet. Some of these options are not adequate to use for precision agriculture. The FCC’s Task Force for Reviewing the Connectivity and Technology Needs of Precision Agriculture in the United States recommends a minimum performance of 100 Mbps download and 20 Mbps upload to support precision agriculture. The percentage of farmers who have internet that can actually support precision ag technologies would be considerably less than that described above. However, programs, such as BEAD, are prioritizing the buildout of fiber optic internet to ensure reliable and fast connections. Fiber optic internet would meet the FCC performance recommendations and allow producers to more easily adopt new technologies and gain the efficiencies that come with them. Currently, many producers in the Southeast are still at a disadvantage, in terms of their internet access compared to other regions. This disadvantage could affect producers’ ability to easily access information and adopt new technologies to improve their operations.
Figure 1. Percentage Change in Farm Operations or Operator Residences Internet Access from 2017 to 2022.
Payment limitations are not a novel policy tool. Modern day limits have been imposed since the 1970 Farm Bill, with multiple changes to the payment limit in subsequent farm bills (Congressional Research Service, 2020; Ferrell, Fischer, Lashmet, 2024). We provide an example of what incentivizes a producer to create a new entity to receive potentially forgone commodity program payments and how it could be completed in practice when appropriate. It should be note that there are rules in place that prohibit farmers from restructuring just to avoid payment limits.
Suppose a producer is one of three members (with equal ownership shares) of Dead and Company, LLC, located in Lawrence County, Arkansas. The entity has 2,800 acres of long grain rice base; the county average Price Loss Coverage (PLC) payment yield is 63 cwt/ac[1], and the payment rate is $2.10/cwt. This would result in a total PLC payment for Dead and Company, LLC of $370,440[2]. However, under current rules, Dead and Company, LLC is subject to a $125,000 payment, and each member is also subject to a personal payment limit of $125,000, however, based on their one-third share they are limited to $41,667. In this example, Dead and Company, LLC receives the full $125,000 payment limit, effectively forgoing $245,440 ($81,813 per member) of the total payment. A visual example is provided in Figure 1 below.
Figure 1. Example of Payment Limit Distribution and Forgone Payment under an LLC
If it makes sense within the operation of the business, the three members of Dead and Company, LLC could choose to reallocate the 2,800 base acres to different entities to increase their individual payment received and stay within the $125,000 individual payment limit. This could be done by creating two new entities, HRE, LLC and Lucky 13, LLC, which have the same three members as Dead and Company, LLC. The three individuals are now members of three different LLCs, each containing 933 acres, or an even share of the 2,800 base acres, resulting in a total payment per entity of $123,436, below the $125,000 payment limit per LLC. While there are three entities that have separate payment limits, one should note that the three entities have to maintain separate sets of books. In other words, while setting up additional entities is relatively easy with the help of a lawyer, the additional time associated with the requirement to maintain separate records for each farm also needs to be taken into consideration. In addition, while the math on this exercise is fairly easy, there are significant rules and procedures that have to be followed when reorganizing to avoid the appearance of reorganizing to take advantage of payment limit rules. Figure 2 shows how the forgone payment due to current payment limit rules increases per individual as each person receives an additional payment from a different entity. In short, each individual receives $41,145 in three PLC payments under Dead and Company, LLC, HRE, LLC, and Lucky 13, LLC.
Figure 2. Payments to each member under base reallocation from Dead and Company, LLC to Lucky 13, LLC and HRE, LLC
The 2014 farm bill provides a unique setting for studying the impact of payment limits on entity creation. First, producers had to make a one-time decision in 2014 for the commodity program to place their base acres in (i.e., ARC or PLC), which would not change for the life of the 2014 farm bill. Second, for a given crop year, all entities would receive a PLC payment if a payment was triggered for a crop in which base acres were enrolled. Third, historical plantings directly tied to the land determine the number of base acres, and enrolled entities are free to dissolve and be created. Therefore, while these conditions do not allow for reallocation to a new program election (i.e., switching from PLC to ARC), they can allow for base acreage reallocation to different entities.
While considering the individual payment limit itself is important in discussions that include higher statutory reference prices, it is also important to consider the number of entities allowed to receive payments. This is because of rules such as the “3-entity-rule” which existed prior to the 2008 farm bill, which repealed this rule. Understanding why a producer would create a new farm entity and how this can be done in practice is important as increasing farm size could limit the whole farm protection provided by commodity program payments and threaten farm income stability.
References
Congressional Research Service, 2020, U.S. Farm Programs: Eligibility and Payment Limits, https://crsreports.congress.gov/product/pdf/R/R46248. Accessed 22 May 2024.
[1] This value was taken from USDA-FSA data files and could be converted to bu/ac using a conversion factor of 2.22. In this case, this same yield in bu/ac is 140 bu/ac.
[2] This value is found by multiplying the total base acreage, the payment yield, and the payment rate.
Based on the USDA’s most recent Census of Agriculture 2022 data for tillage practices, no-till, and conservation/reduced tillage acres comprise 65.4% of the tillage practices for selected southern states (Table 1). For the US, the no-till and conservation/reduced tillage rate is 73.4%. No-till is defined as leaving 50% or more of the soil surface undisturbed from harvest to planting. Whereas conservation and reduced tillage is defined as leaving 30% or more surface undisturbed and may involve chisel plows or light disking (Rust and Williams, 2010). As of 2022, three southern states have the highest rate of no-till and conservation/reduced tillage in the U.S.: Tennessee (93%), Maryland (92.1%), and Virginia (91.7%). The three southern states with the smallest adoption of no-till and conservation/ reduced tillage practices compared to all tillage practices were Florida (39%), Texas (52.1%), and Mississippi (56.8%).
Of interest would be the comparison of southern state’s adoption of these tillage practices over time, which are indicated in Figure 1. The figure displays the percentage change in no-till and conservation/reduced tillage acres at the county level from 2017 to 2022. Green shades indicate percentage decreases in these tillage practices whereas blue shades indicate an increase percentage wise.
Figure 1. 2017 to 2022 Percentage Change in No-Till and Reduced/Conservation Tillage Acres
Source: USDA/NASS Census of Agriculture, 2022
The five southern states with the highest increase in acreage of cropland using no-till plus conservation/reduced tillage practices from 2017 to 2022 are Arkansas (17.6%), followed by Florida (15.3%), Texas (15.1%), Georgia (10.8%), and Alabama (10.7%). The states with the largest average increase in these tillage practices for the three census periods (2012, 2017, and 2022) were Florida (29.3%), Mississippi (20.6%), Arkansas (20.2%), Texas (17.1%), and Louisiana (16.4%).
This information helps us understand which regions within the South are adopting reduced and no-till practices and is also relevant as carbon markets expand. These practices can improve soil health by preserving soil structure, increasing water retention and organic matter. Additionally, they reduce soil erosion and lower greenhouse gas emissions by minimizing soil disturbance. However, given the cropping system, adopting no-till or reduced till may not make sense (e.g., peanut and rice production). Most importantly, the impact and profitability of no-till and reduced-till practices varies depending on the regions and crops involved, influencing adoption rates.
Reference
Rust, B. & J. Williams. 2010. USDA/ARS. “How Tillage Affects Soil Erosion and Runoff.” USDA/ARS Available at https://www.ars.usda.gov/ARSUserFiles/20740000/PublicResources/How%20Tillage% 20Affects%20Soil%20Erosion%20and%20Runoff.pdf.
