IFES 2013: Farms and the Affordable Care Act

This is a presentation summary from the 2013 Illinois Farm Economics Summit (IFES) which occurred December 16-20, 2013 at locations across Illinois. A complete collection of presentations including PowerPoint Slides (PPT), printable summaries (PDF) and interviews are available here.

Two New Medicare Taxes for 2013 Onward

Effective January 1, 2013,  there are two  new Medicare  taxes  that  will  affect  higher-income farmers. The  Net  Investment  Income Tax (NIIT) is a new 3.8% tax on certain types of passive income. Wages, self-employment income and other sources of income subject to Medicare tax may be subject to the new Additional  Medicare  tax  of 0.9%. Whether these taxes will affect a farmer depends upon the farmer’s tax filing status and level of adjusted gross income (AGI) for the year. The income thresholds for each filing status are as follows.

Farmers with incomes above these thresholds may trigger tax liability under the rules for one or both of these new Medicare taxes.

The Net Investment Income Tax

The NIIT is a 3.8% tax on the amount of income for   the   year   that   the   farmer   receives   that constitutes “net investment income”. Generally, this is passive income such as interest, dividends and rental income. Capital gains may also attract the 3.8% tax. The rules in this area are complex but there is a “business exception” to this tax. If the income is from a “trade or business” (as that term is understood under Tax Code §162) and if the farmer “materially participates” (as defined by Tax Code §469) in the activity generating the income, that income will not be considered “net investment income” and will therefore not attract the 3.8% NIIT. For farmers, the greatest concerns are whether the NIIT of 3.8% will apply to rental income (such as cash rents) and capital gains.

As a general rule of thumb, all rental income the farmer receives that is  in  excess  of  the  income  threshold  for  that farmer’s filing status noted earlier will attract the 3.8% tax. In addition, a capital gain from the sale of farmland or other farm property will also attract the 3.8% tax unless the farmer meets the “trade or business” and “material participation” tests.

Additional Medicare Tax

Generally,  this  0.9%  tax  applies  to  wages  or self-employment   income   in   excess   of   the thresholds noted earlier. Generally, if the source of income is already subject to our current Medicare tax, it is the type of income subject to the new 0.9%.

Employer Insurance Mandate

This mandate becomes effective January 1, 2014 with enforcement of any penalties delayed until 2015. Whether a farm business is subject to this mandate and its potential penalties depends upon the  number  of full-time persons the farm business employs. Generally, if there are at least 50  full-time  employees,  the  farm  business  is considered  an  “applicable  large  employer” subject  to  the  employer  mandate  rules. However, special rules exist that must be used to calculate the number of full-time employees. These special rules require the farming business to take into account not only those employees that are actual full-time employees but also part- time employees.  The total number of hours that the  part-time  employees  work  is  used  in  a formula that determines how many “full-time equivalent” (FTE) employees that the part-time workers are composed of. The actual full-time employees and the FTEs are added together to determine whether at least the 50 full-time employees exist that are necessary to subject the farming business to the mandate and possible penalties.

Complex rules exist in connection with the time frame that the employer may use as the counting period for counting employees. A special rule exists for seasonal workers.  Generally, if the only reason a farming business exceeds 50 employees is because of the work of seasonal workers, the farming business will not be considered an applicable large employer as long as the period of time over which the full-time employee count exceeded 50 was 120 days or less in the year. For farmers or farming families owning more than one business, entities are aggregated for purposes of counting employees.

The employer mandate rules do not require a farming business to offer health coverage to full time  employees.  However,  there  are  penalties for a farm business that is subject to the mandate that  either  does  not  offer  coverage  or  which offers coverage that does not meet certain minimum standards. These penalties are not tax deductible.  Farm  businesses  subject  to  these rules will need to file a detailed report each year to the Internal Revenue Service. Which will be used to determine the amount of any penalty.

No farming business or other type of business will be subject to any penalty for 2014 because the requirement to file this detailed report, which triggers the penalty, has been delayed until January 1, 2015. The first report will be filed by farming businesses in early 2016 in connection with the 2015 tax year.

Individual Mandate

Effective January 1, 2014, every farmer will be required to maintain “minimum essential coverage”  (MEC)  unless  they  qualify  for an exemption. Among the exemptions available is an  exemption  for  lower-income  farmers  with incomes low enough that a return isn’t required, an   exemption for hardship (defined using various grounds) and the lack of ability to obtain affordable coverage (meaning generally that the farmer would be obligated to pay more than 8% of household income for health insurance).