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A new Minnesota tax credit helps address one of the biggest barriers preventing young farmers from getting into agribusinesses: land.

Tax strategies

Minnesota Tax Credit Provides an Incentive to Sell to Beginning Farmers

  • Joseph Duda
  • 9/27/2017

When I was younger, I remember all my aunts and uncles crammed around the TV at the family farm on weekends to watch Dallas. Now, our farm in Caledonia, Minnesota was very different from the Mansion on Southfork Ranch in Texas, but if JR lived in Minnesota today, I bet he’d be ready to make a deal, feeling like he has an ace up his sleeve.

Using the new Minnesota young and beginning farmer tax credits that were recently passed into law, JR, and anyone else who is ready to sell, could potentially walk away with the a lot more cash from deals than would have been possible in the past.

Barriers to the business

No matter what the business, there are often barriers to entry. For young farmers, one of the biggest barriers to enter the field has always been land. States like Wisconsin and Iowa have tax credits available for working with younger farmers, selling to related parties, or selling agricultural assets and products.

For example, Wisconsin has a capital gain tax exclusion on the sale of farm assets to a relative rule, and a manufacturing and agricultural credit on eligible qualified production activities income. Iowa has a tax credits for leasing land to a beginning farmer and hiring a beginning farmer to complete custom work. But Minnesota is the first to consider a tax credit on land sales, addressing the biggest hurdle for young farmers.

Encouraging farm legislation

At the beginning of June, I talked with Minnesota House of Representatives’ Nels Pierson (R-Rochester, MN) about his efforts to co-author a neat bill for agriculture. In Minnesota, just 6 percent of farmers are 35 years old or under, and many people in the industry are concerned about the lack of interest in the industry among the younger generation.

Nels’ bill was a welcome incentive for young farmers to stay in the industry, and Minnesota Governor Mark Dayton signed the bill that included tax credits supporting the transition of farms to young and beginning farmers.

Credit and criteria for selling to a new farmer for credit

Established landowners and ag producers can receive a state income tax credit when they sell or rent land or agricultural assets like machinery, building facilities, or livestock to a beginning farmer. A beginning farmer is a producer who entered farming within the last 10 years, is a resident of Minnesota, and who will farm in Minnesota and provide the day-to-day labor on the farm.

Producers qualify if they work with plants and animals useful to humans such as forage, sod, oilseeds, grain, feed crops, dairy, dairy products, poultry, poultry products, livestock, fruits, and vegetables.

The parameters include:

  • The credit equals 5 percent of the sale price, 10 percent of the cash rent, or 15 percent of a crop share rent agreement.
  • Sales to related parties do not qualify, and livestock or equipment dealer sales are not eligible.
  • Beginning farmers must have a net worth under $800,000, take a farm management course, and develop a financial plan with profit potential to quality for the tax incentive. To assist with these requirements, they may be eligible for a $1,500 per year benefit to cover the cost of the training.
  • The tax credit is effective for the 2018 tax year and is funded at $12M with a sunset in 2023. The credit is available on a first come first serve basis and is subject to annual limits and an approval process.

Even with limitations, a credit is a nice bargaining chip

Some limits apply to the credit, but the idea is to provide an incentive to make deals with new farmers more attractive. An owner of agricultural assets is eligible for a credit in the following three situations:

5 percent of the lesser of the sale price or the fair market value of an agricultural asset, up to a maximum of $32,000 — If a farmer sells 220 acres for $1.507 million, and the 9.85 percent Minnesota tax rate applies, the state tax liability $148,440. But if the sale is to a young farmer, the maximum $32,000 credit would apply and would reduce their Minnesota state tax liability to $116,400.

10 percent of the gross rental income in each of the first, second, and third years of a rental agreement, up to a maximum of $7,000 per year — If a farmer rents out 220 acres at $300 per acre and has gross rental income of $66,000, the Minnesota tax bill could be $6,501. Though the farmer does not reach the maximum tax credit of $7,000 allowed, the $6,600 credit gets close and effectively wipes out their related Minnesota tax bill for the next three years.

15 percent of the cash equivalent of the gross rental income in each of the first, second, and third years of a crop share rent agreement, up to a maximum of $10,000 per year — This situation is similar to the rental income example except a crop share rent agreement has a higher maximum, which is possibly intended to reward an established producer or landlord for assisting the young farmer in managing cash flow and risk. Gross revenue under this example of about $70,000 could result in $6,895 in Minnesota taxes. But the maximum $10,000 credit would effectively reduce the Minnesota tax bill to zero for the next three years.

Legislation like this attempts to encourage the next generations of farmers and could help farmers of all sizes, rural or urban, and conventional or organic. The credit is a nice bargaining chip for a beginning farmer to negotiate with established landlords and ag producers: “Work with me and you save on income tax.” And, for an established producer like JR, it is an ace up his sleeve and a way to think differently about who he might consider renting or selling to.

How we can help

No matter where you are located, CLA’s agribusiness team can help you determine which tax credits apply to your situation, and how to best use them. We can also offer you a depth of knowledge about agribusiness transitions, whether you are just getting into the business or considering options for transferring your operation.