n < Hi ( AXHjncaster Fanning, Saturday, October IS, 1988 Commodity Certificates have ■ been a source of much discussion among farmers and tax preparers in recent months, The questions " being asked relate to when the cer tificate value must be reported as income and how much should be reported. Correct answers to those questions depend on how the com modity certificates are used and the farm operator’s prior action with respect to Commodity Credit Corporation (CCC) loans. When a farm operator receives the first loan from the Commodity Credit Corporation (CCC) he or she has a choice of (I) treating the loan as income in the year received or (2) treating the loan as any other loan-that is, not report ing income because the obligation to repay equals the amount received. If the second option is selected and if the crop is redeemed and the loan repaid, subsequent sale of the crop should be reported as income. If the first option is selected and the loan is treated as income, the farm operator has elected a “Sec tion 77.” Section 77 is the part of the Internal Revenue Code that relates to the the tax treatment of Commodity Loans. If such an election is made, then all subse quent CCC loans must be reported as income in the year received unless the Commissioher of Revenue gives permission to with draw the election. Beginning in 1986, a portion of the farm program deficiency and set aside payments were made to farmers in the form of Commodity Certificates rather than cash. Commodity certificates can be sold on the open market, exchanged for cash at county ASCS offices, or used to redeem grain from the Commodity Credit Corporation that is held as security under the 9-month loan or a 3-year reserved arrangement. As a result of the formula used by county ASCS offices, it is pro fitable in some instances and dur ing some periods of time for the farmer to pay off (redeem) a CCC loan with commodity certificates. This is the so-called “PIK and Roll procedure.” Generally, what occurs is the following: 1. The farmer applies for and receives a CCC loan on the crop. 2. Using purchased commodity certi ficates and/or issued certificates, the farmerredeems his orher grain from the CCC by repaying the loan with the commodity certificates instead of cash. 3. Based on his or her normal marketing patterns, the farmer then sells the redeemed grain. The income tax consequences of the "PIK and Roll” relate to the option selected by the farm opera tor for reporting income from CCC loans. If a farmer has not elected the Internal Revenue Code Section 77 (docs not treat the CCC loan as income in the year the loan is received), the following tax con Hi <2 Jsi 't • 'll’*- f I I i t- • sequences result from receipt of a CCC loan, receipt of a commodity certificate and use of the certificate to pay off the loan. 1. Receipt of the loan is not reported as income. 2. Receipt of a commodity certificate is reported as income. This establishes a tax basis in the certificate equal to the amount of income reported. 3. The difference between the tax basis in w the certificate and the loan amount is reported as income when the cer tificate is used to pay off the loan. 4. The farmer’s tax basis in the redeemed grain is zero. Therefore, a subsequent sale of the grain will result in gross income equal to the sale price. Feeding the grain will result in no deduction. Example 1: A farmer sealed the 1987 com crop and received a CCC loan of $12,000. The farmer is a cash-basis taxpayer and has not elected to report CCC loans as income. In 1987, the farmer also received commodity certificates with a face value of $lO,OOO. Under the PIK and roll rules, the farmer used the certificates to pay off the loan and still had the com at -the end of 1987. The tax consequences arc as fol low. The $12,000 loan is not income. Receipt of the certificates result in $lO,OOO of income. Use of the certificate to pay off the loan results in another $2,000 of in come. The farmer then has a zero basis in the com. When the com is sold, the amount received will be An Employee Owned Company As A New Authorized Dealer For Introductory Offer For Month Of October: Parts and Service We cany a strong inventory of Genuine Badger Northland replacement parts We sell Badger equipment and it is our policy to be in a position to service what we sell fast You can depend on Badger products and you can depend on us to provide Badger Quality Service UOUtD SPREADER TANKS VACUUM TANKS &r Bbsui)!, RING DRIVE SILO UNLOADERS TUMBLE-MIX FEED WEIGHER/MIXER LOW PROFILE ROLLER MILL Is Pleased To Announce FARMER BOY AG. JNG 410 EAST LINCOLN AVI. MYMSTOWW. PA 170*7 PH; 717.Q>4-y»>»_ Bodqer Parts & Equipment ot: fa SIM® On Any Of The Following Badger Equipment Ordered During The Month Of October, 1988 • LIQUID MANURE VACUUM & SPREADER TANKS • SILO UNLOADERS • FEED WEIGHERS/ » MIXERS ill M 0 EAR CORN I A II BLOWER MILL y Mil • FEEDERS & CONVEYORS • ROLLER & BLOWER MILLS • MANURE AUGERS reported as gross income. If a farmer has elected the Inter nal Revenue Code Section 77 and reports CCC loans as income in the year the loan is received, the following tax consequences result» from receipt of a CCC loan, receipt of a commodity certificate and use of the certificate to pay off the loan. 1. Receipt of the CCC loan is reported as income and the farmer has a basis in the commodity equal to the amount of the loan. 2. Receipt of a commodity certificate is reported as income (the face val ue of the certificate is reported as income). 3. The difference between basis in the certificate and the loan amount is used to reduce the basis in the commodity. There fore, a subsequent sale of the com modity will result in a gain or loss measured by the difference between the basis in the commodi ty and the sale price. Use of the commodity as feed will result in a deduction equal to the basis in the commodity. Example 2; Assume the same © m • BARN CLEANERS & * REPLACEMENT CHAINS • PIT ft LAGOON PUMPS. • TRANSFER PUMPS • BEDDING CHOPPERS facts as in the first Example above, except that the fanner has elected the Internal Revenue Code Section 77 to report CCC loans as income in the year received. In this case, the “PK and Roll” procedure has the following tax consequences. Upon receipt of the CCC loan, the farmer must report $12,000 of income. This results in a $12,000 tax basis in the com. Receipt of the certificate results in another $lO,OOO of income. Use of the cer tificate to pay off the loan requires the fanner to reduce the basis in the com by $2,000 to $lO,OOO. If the com is used for feed on the farm, the fanner can deduct the $lO,OOO basis. If the com is sold, the gain or loss will be calculated using this $lO,OOO basis. ROPE IN SOME EXTRA nC4 CASH! , '#» Advertise With A Sfi . Lancaster Farming j I i CLASSIFIED AD Phone 717 394 3047 or 717 626-1164 Cash Discount On Any Parts Ordered During The Month Of October For Delivery After November 15, 1988. fa. DURAFORGED