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The Farm Bill of 2008

On May 22, 2008, Congress successfully overrode President Bush's veto of H.R. 2419, the Food, Conservation, and Energy Act of 2008, also known as the Farm Bill, enacting the legislation into law. It is unclear whether litigation challenging this legislation will follow.

Key provisions of this Act are:

• Enhances eligibility for like-kind exchange tax treatment: Under the Act, for exchanges completed after May 22, 2008, the like-kind exchange rule under IRC Section 1031 that bars exchanges of stocks does 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 IRC 501(c)(12)(A) 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.

• Extends for 2 years the favorable tax treatment of capital gain property donated for qualified conservation : Under the Pension Protection Act of 2006 (PPA), for contributions made in tax years beginning in 2006 and 2007:
  1. The usual 30% limitation on contributions of capital gain property by individuals of any qualified conservation contribution to a qualified organization is increased to 50%, and individuals may carry over any qualified conservation contributions that exceed the 50% limitation for up to 15 years.
  2. An individual who is a qualified farmer or rancher is allowed up to 100% of their contribution base for such charitable contributions.
  The Act extends the above PPA provisions for two years (i.e., they apply for contributions made in tax years beginning after 2007 and before 2010).

• Provides Kansas tornado disaster relief: The Gulf Opportunity (GO) Zone tax breaks are extended to the Kansas Presidential Disaster Area. This is the area declared and determined by the President to warrant individual or individual and public assistance from the Federal Government with respect to damages attributable to storms and tornados that began May 4, 2007. These include tax incentives to encourage rebuilding of areas hit hardest by the disaster (including 50% first-year bonus depreciation, an enhanced expensing allowance, partial expensing of demolition and cleanup costs, and a 5-year NOL carryback period); tax breaks to help individuals cope with the disaster (including special rules for retirement plan distributions, loans, and recontributions, and eased casualty loss rules); an employee retention credit; and bond provisions designed to stimulate rebuilding in the affected area. This provision is effective as of May 22, 2008.

• Excludes from SECA tax Conservation Reserve payments to retired and disabled farmers : The Act provides that Conservation Reserve Program (CRP) payments made after 2007 will not treated as self-employment income for Self-Employment Contributions Act (SECA) tax purposes if such payments are received by an individual who is getting Social Security retirement or disability payments.

• Provides a new deduction for endangered species recovery expenses : Expenses paid or incurred after 2008 by farmers to achieve site-specific management actions under the Endangered Species Act of 1973 are treated the same as expenses for the purpose of soil or water conservation. Thus, such expenses are deductible, subject to the 25% of gross farming income limitation.

• Enhances depreciation for race horses: Under the modified accelerated cost recovery system (MACRS), any racehorse that is more than two years old when it is placed in service is assigned a three-year recovery period. A seven-year recovery period is assigned to any racehorse that is two years old or younger when it is placed in service. Under the Act, for property placed in service after 2008 and before 2014, all racehorses are assigned a three-year recovery period, regardless of their age. Cuts for 1 year the capital gain tax rate for sales of qualified timber: The Act provides a 15% alternative tax rate for corporations on the portion of taxable income that consists of qualified timber gain (or, if less, the net capital gain). The alternative 15% tax rate applies for both regular tax and alternative minimum tax purposes. Generally, the 15% alternative tax rate for qualified timber gain applies only to tax years ending after May 22, 2008 and beginning on or before May 22, 2009.

• Creates an agricultural chemicals security tax credit: A 30% credit is created for agricultural businesses who have qualified chemical security expenditures. For expenses paid or incurred after May 22, 2008 and before January 1, 2013, the new credit, which is a component of the general business credit, is limited to $100,000 per facility reduced by the aggregate amount of the credits allowed for the facility in the prior five years. In addition, each taxpayer's annual credit is limited to $2,000,000. The taxpayer's deductible expense is reduced by the amount of the credit claimed.

• Limits the deduction for farm losses: For tax years beginning after 2009, the farming loss of a taxpayer, other than a C corporation, for any tax year in which any applicable subsidies are received are limited to the greater of (a) $300,000 ($150,000 for a married person filing separately), or (b) the taxpayer's total net farm income for the prior five tax years. 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 Commodity Credit Corporation (CCC) loan.

• Modifies the alcohol credit: The 51-cent-per-gallon incentive for ethanol is adjusted to 45 cents per gallon for 2009 and 2010.

• Provides a credit for the production of cellulosic biofuel: The cellulosic biofuel producer credit is added to the alcohol fuel credit for fuel produced after December 31, 2008. This credit is a nonrefundable income tax credit. In general, the amount of the credit per gallon is $1.01.

Also, the Act liberalizes the rules for REITs holding timber investments, and increases and indexes the dollar thresholds for optional methods of computing the net earnings of self-employed farmers, and includes other miscellaneous provisions.