By the end of 2011, the dairy industry thought it had taken a turn to better days, but instead it was just a “U-turn” to higher feed prices and dropping milk prices in 2012. Some operations still experiencing weak legs from the 2009 downturn might not be able to pick themselves up off the mat this time. If all of your options have been exhausted, including reorganization under Chapter 11, then you might decide it is time to throw in the towel. For those who go this route,

Tax consequences when it comes time to hang up the gloves Progressive Dairyman

it is very important to consult with your CPA on the tax implications of liquidation.

When your CPA puts together a liquidation plan, it should compare the fair market value (FMV) of the company’s balance sheet to its cost basis. (Cost basis is the amount the assets were originally purchased for. For fixed assets the basis should be adjusted using tax depreciation, not book. Other considerations are assets that were contributed to the company

that have built-in gains or losses.)The difference between the FMV

of the assets and the cost basis is your deemed taxable gain or loss. For assets owned for more than one year, such as most of the equipment and the barn, they will get preferential tax treatment and taxed at the long-term capital gains rates which generally stand at a maximum of 15 percent. (A portion of gains on depreciable property will be taxed at rates of 25 percent and higher for depreciation recapture.)

Keep in mind that farmers have to play by special rules that require their animals to be held for at least 24 months to receive capital gains treatment. Items not eligible for capital gains treatment such as inventory and accounts receivable should be factored at ordinary income tax rates, which currently stand at a max of 35 percent.

After determining the value and basis of assets, we determine the amount of gain or loss. This will depend in part on the nature of the entity the farmer has chosen to operate the business. In the case of a partnership or limited liability company, there is usually only one layer of taxation and that is when assets are sold. The gain or loss is determined by reference to the sale price and there is no separate tax on the winding up and dissolution of the business entity. The same is true for sole proprietorships. Things become considerably more complicated when a corporation has been used as the operating entity.

There are two types of corporations – S corporations and C corporations. Of the two, a C corporation is the worst when a business is being dissolved because the entity is taxable on the sale of the assets and the shareholders are taxed on the dissolution proceeds received from the business. While there are ways to minimize this double tax, it takes the experienced hand of a qualified CPA to properly structure the transaction. An S corporation is not as bad because the gain derived from the sale of the assets by the corporation are passed through to the shareholders and therefore additional gain on liquidating distributions is minimized. There are a lot of rules and complexities dealing with the dissolutions of S corporations and, again, good advice is a must.

Now that we know the basics for calculating the taxable gain on the liquidation plan, let’s discuss strategy. Before closing on the sale of your company, a conversation needs to take place with the buying party on how the sales proceeds are allocated amongst the assets. Don’t let this be an afterthought, because this can alter your tax liability significantly and the allocation is required by the IRS. As a seller, one of your goals is to minimize the recognition of ordinary income on depreciable assets and thus allocate more proceeds to non-depreciable property, such as land. The buyer typically wants to do the opposite so they can recognize larger future depreciation deductions on the acquired property. Depending on the health of the relationship at this point in the negotiations, you should expect some pushing back and forth, but a common ground that pleases both parties is certainly attainable.

Most operations resorting to liquidation these days are unable to pay back the balance of their secured

Order Direct 888-444-2030or contact your area reseller

920-682-0264 | forhealthycows.com

Products - from the ������������ & Nutrition CompanyTM

����������� ������ � ��������� ������������ �������������������������� ��� ��������� ������ ��������� ���������

�� ��������� ��������� �� ��������� �� �������

�� ����� ��������� �� !� ��� � "��� !� ��� � "�����������

�������������� �� � � �������

RESELLERS WANTED In selected areas. Call for details.

A healthier and more stable rumenThe P-One ProgramTM

Contains Branded Strains A4000hTM and A2020TM

EZ OPEN – Hold Wide Tape…Pull Small Tape

� ����������������

���������� ������������� �����

From - the ������������ & Nutrition CompanyTM

makers of P-One™ and the P-One Program™

Contains a source of live (viable) naturally occurring microorganisms, Amylase which can hydrolyze starch, Protease which can hydrolyze proteins, beta-Glucanase which can hydrolyze ß-glucans (a type of non-starch polysaccharide), Hemicellulase which can break down hemicellulose.

Guaranteed AnalysisTotal Propionibacteria (minimum) .............................................16 billion cfu/lb (35 million cfu/gram)(Propionibacterium freudenreichii)

Total Yeast (minimum) ...........................................................300 billion cfu/lb (661 million cfu/gram) (Saccharomyces cerevisiae)

Enzyme Activity (minimum)Bacterial Amylase (Bacillus subtilis) ...........................................................................59,000 BAU/lb.Fungal Amylase (Aspergillus oryzae) ......................................................................... 47,625 SKB/lb.Fungal Protease (Aspergillus oryzae) .........................................................................34,020 HUT/lb. beta-Glucanase (Trichoderma longibrachiatum) ..............................................................454 BGU/lb.Hemicellulase (Aspergillus niger).....................................................................................113 HCU/lb.

IngredientsSodium bentonite, yeast culture, rice hulls, dried yeast, dried Bacillus subtilis fermentation extract, dried Aspergillus oryzae fermentation extract, dried Trichoderma longibrachiatum fermentation extract, dried Aspergillus niger fermentation extract, sodium silico aluminate, mineral oil, dried Propionibacterium freudenreichii fermentation product.

Directions for UsePre-fresh Cows (or Lactating Cows): Feed DCP at 1 ounce per head per day for 14–21 day period to colonize and act as a lactic acid utilizer. Follow with feeding P-One™ (see P-One label for proper use).

For proper use, consult your P-One Specialist.

Storage RecommendationsStore in a cool, dry area out of direct sunlight.

Manufactured For: Priority Int’l Animal Concepts™

3504 County Road CRManitowoc, WI 54220 USA

FULL WARRANTY/DISCLAIMER INFORMATION IS ON OUR WEBSITE: forhealthycows.com

Net wt. 30 lb. (13.64 kg)

� ��������������� ��������� � ������

������������ �������������������������������

44 Progressive Dairyman

ncees wwhenn it ccomes timme to hang uairyman

is vour

liquid

y importPA on the

ation.When your C

t to cx im

PA p

nsult withlications o

s together a

th

od

have built-in gaThe difference be assets and theed taxable gain

or losseween the

cost basis isor loss. For a

MV oursset

Keplth24

liquidation plan, it should comparethe fair market value (FMV) of the

owned for more than one year, such asmost of the equipment and the barn

trega

Kevin HernandezCertifi ed Public Accountant

Frazer LLPkhernandez@frazerllp.com

obligations upon liquidation. If the lender agrees to forgive a portion of the debt, the owner(s) must recognize this cancellation of debt as taxable income. I know at this point you are asking yourself, “Is there anything the IRS will not tax me on?” You might be able to fi nd some relief in this department.

Th e IRS has prescribed several scenarios under which a taxpayer may exclude cancelled debt from their gross income. Th e three most notable exceptions are fi ling for bankruptcy under Chapter 11, insolvency, and if the debt was incurred in connection with the farming operation and in the previous three years at least 50 percent of the gross receipts were attributable to farming. Additionally, if the debt was from a private lender, such as a friend or relative, there is no income if the cancellation was intended as a gift. As the old saying goes, there is no such thing as a free lunch. Th e exclusion will decrease your tax attributes, such as net operating loss carryforwards or a reduction in the basis of qualifi ed property.

On top of everything, you must also consider the taxable income from operations in the fi nal tax year. Th e fact that the Internal Revenue Code gives farmers a unique set of tax loopholes such as deferring milk checks and deducting prepaid inventory means that any deferred income from previous tax planning decisions will be recognized in the year you liquidate. If you have elected to utilize these tax strategies in previous years to keep your tax bill down, that might mean the IRS feels it is time to pay the piper.

However, from a tax standpoint the rising feed prices and struggling milk prices we have experienced in 2012 should help you off set some of that deferred income. In fact, if you must execute a liquidation plan in 2012, there is at least one bright side. Th e Bush tax cuts are scheduled to expire on January 1, 2013, at which time the tax rates will be increased to the levels before 2001. PD

“You may not be interested in global macroeconomics, but global macroeconomics is interested in you, your business, your family and your personal lives,” Dr. David Kohl said recently at the Professional Dairy Producers of Wisconsin (PDPW) Business Financial Decision-Making Conference.

A professor emeritus of agricultural and applied economics at Virginia Tech, Kohl explained the new normal is black swans, volatility and extremes. In order to play the game of volatility, it is important to understand the conditions that will have an impact. He went on to highlight six key game-changers to watch as we enter a new year.

Black swansBlack swans are events that

come as a surprise and have a major eff ect. Two of these on Kohl’s radar are the Middle East and cyber attacks.

Oil could increase to $200 a barrel very, very quickly if Iran and Israel break out, he said, resulting in $6 gasoline. Since 80 percent of a farm’s expenses are connected to oil, these will go up quickly as well. In addition, consumer behavioral economics kick in at $4 per gallon. At this price point, people continue to buy gasoline but they don’t buy additional items in the store, which causes a ripple eff ect in the economy.

Cyber attacks have the ability to knock down electrical systems, computer systems, etc. A major event here could result in extreme volatility.

“I’m not saying it’s going to happen – but it can happen,” he said.

State of global economicsTh e BRICS (Brazil, Russia,

India, China and South Africa) and the KIM-Ts (South Korea, Indonesia, Mexico and Turkey) are as big as the U.S. economy put together – but since

2000, they’ve represented half of the world’s growth.

Th ese countries are what fueled the growth of U.S. grain demand. “Agriculture in rural America, your economic fortunes, are more tied to emerging nations than they are the U.S. economy,” Kohl said. “So goes those countries, so goes the health of the American dairy industry, because they demand grain. You’re competing against them.”

Th ree numbers to keep in mind are eight, fi ve and three. Emerging nations growing at 8 percent growth rate or above result in heavy demand for corn, soybeans, wheat, oil, steel and copper. If the countries drop back to 5 percent growth, it will take 20 percent off the price of commodities. If these nations grow at only 3 percent, it means offi cially they are in a recession, he said, noting an emerging

Global and domestic game-changersto watch in 2013Progressive Dairyman

Continued on page 47

1 2

PALMERM A N U F A C T U R I N GCall today and ask for Larry Palmer

Thank-You, Dairymen in CANADA, TN, TX, WI, MN, IA, OH, UT, ID and even Brazil for your recent orders! Portable & Stationary

Trimming ChutesStandard, Economy & Galvanizedy & Galvanizedy & Galvanizedyymyyy ddaaaa&& GalvanizeGG dzediinnnnavallamy & GaGalvanizedy alvanized& Gmy & Galvaniy & Galv

208.747.3557 or 208.308.3119888.844.8460 toll-free U.S. & Canada

Got Galvanized? Hot-Dipped Galvanizing Process WILL NOT Rust!!

Progressive Dairyman 45

e s

Glot

obal t

andh i

do20

me013

sticc gamme-chae.

ill

g

tPr

“You mayobal macroec

wgressive

not bonom

tcairym

interested ics, but glob

h in an

2013

Oil could incrrel very, very q

3

ase to $200uickly if Iran

aand

2w

macroeconomics is interested in you, your business your family and your

Israel break out, he said, resultingin $6 gasoline Since 80 percent of th

y