Begin planning now to use Ohio’s Beginning Farmer Tax Credit Program

Ohio’s Beginning Farmer Tax Credit Program aims to help level the playing field for beginning farmers in Ohio. It does so by providing income tax benefits for both a beginning farmer and someone who transfers farm assets to the beginning farmer.  The new program first became available for the 2023 tax year, and sunsets on January 1, 2028, or when total income tax credits granted amount to $10 million. Participating in the program requires good planning, so now is the optimal time for existing and beginning farmers to consider how best to utilize the program while program funds are still available.

Our law bulletin, Ohio’s Beginning Farmer Tax Credit Program, can help guide planning efforts.  The bulletin explains how the program works and outlines the process for qualifying for the program’s income tax credits.  That process includes:

1.  Meeting eligibility requirements to become certified by the Ohio Department of Agriculture (ODA) as a “qualified beginning farmer.”  The first step, then, is to determine whether an individual can meet the eligibility requirements, which are: 

• A resident of Ohio.
• Seeking entry to or has entered farming within the last 10 years.
• Farming or intending to farm in Ohio.
• Has a total net worth of less than $800,000 in 2021, including spouse and dependent assets, as adjusted for inflation each year.
• Provides the majority of the daily physical labor and management for the farm.
• Has adequate farming experience or knowledge in the type of farming the individual is conducting.
• Submits projected earnings statements and demonstrates profit potential.
• Demonstrates farming will be a significant source of income for the individual.
• Is not a partner, member, shareholder, or trustee of the assets the individual is seeking to purchase or rent.
• Completes an ODA-approved financial management course.

2.  Completing training and applying to ODA for certification as a “qualified beginning farmer.”  One component of attaining the program’s eligibility requirements is completing a financial management course, which an individual who meets all other program requirements must do before applying to ODA to become certified. OSU Extension offers two of the 12 ODA-approved financial management programs an individual can complete to meet the training requirement. 

• After completing an eligible financial management course, the individual must submit an application to ODA’s Office of Farmland Preservation to be approved as a qualified beginning farmer.  The application requires submitting information and documentation showing that the individual meets the eligibility requirements. 
• If ODA approves the application, the individual will receive a state income tax credit certificate for the amount paid for completing the financial management course.  The qualified beginning farmer can use the tax credit on the current year’s tax return and can carry it forward for three succeeding tax years.
• A list of eligible financial management courses and the application to become a qualified beginning farmer are on the ODA website at https://agri.ohio.gov/programs/farmland-preservation-office/Beginning-Farmer-Tax-Credit-Program.

3.  Transfer of agricultural assets to a qualified beginning farmer.  The program also creates a financial incentive for owners who sell or rent agricultural assets to an individual who has been certified as a qualified beginning farmer, as long as the beginning farmer is not a partner, member, shareholder, or trustee with the owner of the agricultural assets.  The asset owner will receive an Ohio income tax credit equal to 3.99% of the asset sale price or gross rental income received during a calendar year for a cash or share rental lease, and can carry the credit forward for up to seven years. 

• “Agricultural assets” include land in agricultural production (10 or more or if under 10 acres, earning $2500 in average annual gross income from agriculture), livestock, facilities and buildings, and machinery (but not if the owner of machinery is an equipment dealer).
• A sale of assets must occur in the same calendar year the owner applies for the tax credit.
• In the case of a rental of assets, the credit can be claimed over the first three years of the lease.

4.  Application for a tax credit by the asset owner.   To receive the 3.99% income tax credit, the asset owner must submit a Beginning Farmer Tax Credit Asset Transfer Form application to ODA. The asset owner must submit a copy of the qualified beginning farmer’s certification certificate with the application, which is available on the ODA website at https://agri.ohio.gov/programs/farmland-preservation-office/Beginning-Farmer-Tax-Credit-Program. If ODA approves the application, the Ohio Department of Taxation will issue a tax credit certificate to the asset owner.

It is important for both the beginning farmer and the agricultural asset owner to understand the process for qualifying for the income tax credits the new program offers.  Timing is critical, as the beginning farmer must complete the training and become certified as a qualified beginning farmer before a transfer of agicultural assets occurs.  It’s also important for existing asset owners to coordinate program participation with estate and transition plans.  Now is the time to consult with professional advisors and begin planning for program participation for the 2024 tax year. 

Learn more about the Beginning Farmer Tax Credit Program in our law bulletin, available in the tax law library on https://farmoffice.osu.edu/our-library/tax-law and by visiting the ODA’s website at https://agri.ohio.gov/programs/farmland-preservation-office/Beginning-Farmer-Tax-Credit-Program.

Ohio ag legislation we’ll be watching in the new year

Written by Ellen Essman, J.D., OSU CFAES Government Relations

Just like there won’t be snow flurries on Christmas this year, there was not a flurry of activity at the Statehouse over the last few months. That being said, we will be carefully following several ag-related bills that progressed in committees but have not yet been passed by the full body, as the calendar turns to 2024. Here’s a summary of the bills we’re watching. 

H.B. 162—Agriculture Designations. H.B. 162 was introduced by Representatives Roy Klopfenstein (R-Haviland) and Darrell Kick (R-Loudonville) on May 5, 2023, and was passed by the House in October, and had its first hearing in the Senate Agriculture and Natural Resources Committee on December 5. The bill would designate the following days and weeks to honor Ohio Agriculture:

• March 21 of each year as “Agriculture day;”
• The week beginning on the Saturday before the last Saturday of each February through the last Saturday in February as “FFA Week;”
• October 12 of each year as “Farmer’s Day;” and
• The week ending with the second Saturday of March as “4-H Week.”

H.B. 347—Farming Equipment Taxes. This bill was introduced by Representative Don Jones (R-Freeport) and referred to the House Ways and Means Committee in early December.  The bill would change the way farmers claim a tax exemption on certain purchases. 

Currently, when an Ohioan engaged in farming, agriculture, horticulture, or floriculture is buying a product for “agricultural use,” they must provide the seller with an exemption certificate. This certificate comes from the Ohio Department of Taxation and relieves the seller of the obligation to collect the sales tax on behalf of the state.  However, the Department of Taxation can later determine that the purchase does not qualify for exemption, and then the farmer would be expected to pay the tax. 

H.B. 347 would slightly alter this current way of doing things when it comes to the purchase of certain vehicles and trailers.  Under the bill, the purchaser could receive an agricultural use exemption for taxes on these vehicles if the purchaser shows the seller copies of the purchaser’s Schedule F—the federal income tax profit of loss from farming form—for three most recent preceding years. Alternatively, a farmer could obtain a certificate from the Department of Taxation verifying that they have filed a Schedule F for three years in lieu of providing the forms directly to the seller.  Notably, the bill states that “no other documentation or explanation shall be required by the vendor or the tax commissioner” to prove that the purchase qualifies for the agricultural use exemption.

The following vehicles and trailers would be included under the bill:

• Trailers, excluding watercraft trailers;
• Utility vehicles, (vehicles with a bed, principally for the purpose of transporting material or cargo in connection with construction, agricultural, forestry, grounds maintenance, land and garden, materials handling, or similar activities);
• All-purpose vehicles, (vehicles designed primarily for cross-country travel on land and water, or on multiple types of terrain, but excluding golf carts);
• Compact tractors (garden tractors, small utility tractors, and riding mowers).

H.B. 364—Agriculture (seed sharing). House Bill 364 was introduced in the House by representatives Dave Dobos (R-Columbus) and Roy Klopfenstein (R-Haviland) on December 14.  The bill would allow the Ohio Prairie Association to distribute milkweed seeds non-commercially to its members, with the intent of promoting habitats for pollinators like monarch butterflies.

The bill would legally define “non-commercial seed sharing” as the distribution or transfer of ownership of seeds with no compensation or remuneration.  Also included in the definition are a list of situations that are not considered “non-commercial seed sharing,” including when:

• The seeds are given as compensation of work or services rendered;
• The seeds are collected outside of Ohio;
• The seeds are patented, treated, or contain noxious weed species or invasive plants.

H.B. 364 also includes a definition of “seed library,” which it defines as a non-profit, governmental, or cooperative organization or association to which both of the following apply:

• It is established for the purpose of facilitating the donation, exchange, preservation, and dissemination of seeds among the seed library’s members or the general public.
• The use, exchange, transfer, or possession of seeds acquired by or from the non-profit governmental, or cooperative organization or association are obtained free of charge.

The bill would further exempt non-commercial seed sharing for the purposes of pollinator conservation, creating and conserving native habitats, and operation of a seed library from labeling, advertising, handling, and sales restrictions under Ohio law.

To further the goal of promoting pollinators and habitats, H.B. 364 would make changes to the requirements for maintaining toll roads, railroads, or electric railways. Current law requires managers of such thoroughfares to destroy a number of noxious weeds along the roadway or in right of ways. The bill would no longer require the destruction of Russian thistle, Canadian thistle, common thistle, wild lettuce, wild mustard, wild parsnip, ragweed, milkweed, or ironweed. 

Ohio House and Senate differ on CAUV property tax relief

Responding to concerns about potential increases in Ohio property taxes, the Senate passed House Bill 187 (HB 187) this week to provide some relief from property tax hikes.  That relief, however, affects only the Ohio homestead exemption.  The Senate removed provisions the House had passed in HB 187 offering relief on other property taxes, including Current Agricultural Use Valuation (CAUV) taxes.  The House and Senate differences mean the CAUV adjustments originally in HB 187 are currently at a standstill.

House Bill 187.  The House passed its version of HB 187 in October.  The House version included provisions that would temporarily adjust CAUV calculations until 2026.  When updating the CAUV value, a county auditor would be required to use an average of the CAUV formula value for the current year along with CAUV values that would have been assigned in each of the preceding two years, since the last update.  This three year averaging would lower the expected increase in the new CAUV value.  But the Senate drafted and passed a substitute of HB 187, and the substitute bill does not contain the CAUV language. The House and Senate must now confer on its differing versions of HB 187 to work out the differences.

Senate Bill 153.  The Senate isn’t completely ignoring the CAUV adjustments—they exist in another bill.  Senate Bill 153 (SB 153), introduced in the Senate back in September, contains the same CAUV language as HB 187.  The Senate Ways and Means Committee held four hearings on SB 153 in September and October.  But the committee has not taken any action on the bill since the last hearing on October 11.

What’s next for CAUV relief?  There are two avenues to enacting the CAUV three year averaging provisions that could bring some relief from CAUV increases.  First is for the Senate to reinsert the provisions in HB 187.  The second is for the Senate to pass SB 153 and send it over to the House for consideration.  From our view, it’s difficult to gauge if the House and Senate are on the same page for completing either route.

Follow HB 187on the legislature’s website at https://www.legislature.ohio.gov/legislation/135/hb187 and track SB 153 at https://www.legislature.ohio.gov/legislation/135/sb153.

Agricultural easements can address farmland preservation and farm transition goals

Questions from farmers and farmland owners about agricultural easements are on the rise at the Farm Office.  Why is that?  From what we’re hearing, the questions are driven by concerns about the loss of farmland to development as well as desires to keep farmland in the family for future generations.  An agricultural easement is a unique tool that can help a farmland owner and farming operation meet goals to protect farmland from development or transition that land to the next generation.  Here are answers to some of the questions we’ve been hearing.

What is an agricultural easement?  An agricultural easement is a voluntary legal agreement by a landowner to use land primarily for agricultural purposes and forfeit the right to develop the land for other purposes, either permanently or, less often, for a term of years.  In an agricultural easement, a landowner grants an easement “holder” the legal right to enforce the easement against a landowner or other party who attempts to convert the land to a non-agricultural use. A written legal instrument details and documents this agreement between a landowner and the easement “holder.”  The agricultural easement instrument must be recorded in the county land records, and the agricultural easement is binding on all future landowners for the duration of its term.

A state legislature must authorize the use of the agricultural easement instrument, and Ohio’s legislature did so in 1999.  At that time, the legislature adopted a detailed legal definition of “agricultural easement” in Ohio Revised Code 5301.67(C):

“Agricultural easement” means an incorporeal right or interest in land that is held for the public purpose of retaining the use of land predominantly in agriculture; that imposes any limitations on the use or development of the land that are appropriate at the time of creation of the easement to achieve that purpose; that is in the form of articles of dedication, easement, covenant, restriction, or condition; and that includes appropriate provisions for the holder to enter the property subject to the easement at reasonable times to ensure compliance with its provisions.

The legislature also required in Ohio Revised Code 5301.68 that a landowner may only grant an agricultural easement on land that qualifies for Ohio’s Current Agricultural Use Valuation (CAUV) program under Ohio Revised Code 5713.31.

Is an agricultural easement the same as a conservation easement?  No, not in Ohio, but they share the same legal concept of dedicating land to a particular use.  Ohio also allows a landowner to grant a conservation easement, which is a promise to retain land predominantly in its natural, scenic, open, or wooded condition and forfeit the right to develop the land for other purposes.  A conservation easement might allow agricultural land uses, and an agricultural easement might allow some conservation uses.  The terms used in federal law and some other states vary from Ohio, and include “agricultural conservation easement” or “agricultural land easement.”

Who can be a “holder” of an agricultural easement?  Ohio law answers this question in Ohio Revised Code 5301.68, which authorizes only these entities to enter into an agricultural easement with a landowner:

• The director of the Ohio Department of Agriculture;
• A municipal corporation, county, or township;
• A soil and water conservation district;
• A tax exempt charitable organization organized for the preservation of land areas for public outdoor recreation or education, or scenic enjoyment; the preservation of historically important land areas or structures; or the protection of natural environmental systems (generally referred to as a “land trust” or a “land conservancy.”)

What kinds of land uses would be inconsistent with keeping the land in agricultural use?  That depends on the terms in the written deed for the agricultural easement.  Activities that might violate the agreement to maintain the land as agricultural include subdivision of the property, commercial and industrial uses, major surface alterations, and oil and gas development.  It’s typical to identify the homestead or “building envelope” area and allow new buildings, construction and similar activities within that area, but those activities might not be permitted on other parts of the land.  Review the  Ohio Department of Agriculture’s current Deed of Agricultural Easement through the link on this page:  https://agri.ohio.gov/programs/farmland-preservation-office/landowners.

Can a landowner transfer land that is subject to an agricultural easement?  Yes.  An agricultural easement does not restrict the right to sell or gift land, but it does carry over to the new landowner.  That landowner must abide by the terms of the agricultural easement.

Are there financial incentives for entering into an agricultural easement?  Yes.  There are several financial incentives:

• The Ohio Department of Agriculture’s Office of Farmland Preservation oversees the Local Agricultural Easement Purchase Program, which provides Clean Ohio grant funds to certified local sponsors to purchase permanent agricultural easements in their communities.  It’s a competitive process that requires a landowner to work with an approved local sponsor to apply for the program and to donate at least 25% of the agricultural easement’s value if selected.  A landowner can receive up to 75% of the appraised value of the farm’s “development rights,” with a payment cap of $2,000 per acre and $500,000 per farm per application period.
• Federal funds are also available through the Natural Resource Conservation Service’s Agricultural Conservation Easement Program. This program is also competitive and requires a landowner to work with an approved partner to determine eligibility and apply for easement funding.  NRCS may contribute up to 50 percent of the fair market value of the agricultural land easement.
• There are also federal income tax incentives for donating a portion or all of an agricultural easement’s value to a qualified charitable organization.  Internal Revenue Code section 170(h) allows a landowner to deduct the value of the easement up to 50 percent of their adjusted gross income (AGI) in the year of the gift, with a 15-year carryover of excess value.  That AGI percentage increases to 100% for a “qualified farmer” who earns more than 50% of their gross income from farming.
• There can also be federal estate tax benefits for land subject to a permanent agricultural or conservation easement.  The land is valued at its restricted value, which lowers the estate value.  Additionally, Section 2055(f) of the Internal Revenue Code allows donations of qualifying easements to a public charity to be deducted from the taxable value of an estate.  Up to 40% of the value of land restricted by an agricultural or conservation easement  can be excluded from the value of an estate if the easement meets Internal Revenue Code section 2031(C) provisions, limited to $500,000. 

How can a family use an agricultural easement to enable farm transition goals?  Here’s an example.  John and Sue are fourth generation owners of 250 acres of farmland they plan to leave to their child Lee, and they want the land to remain as farmland into the future.  Lee is committed to farming and wants to farm, and John and Sue would like Lee to have more land to improve the viability of the farming operation. They find a local sponsor and apply to Ohio’s Local Agricultural Easement Purchase Program, offering to donate 25% of the agricultural easement value to the program.  They are selected for the funding and receive a payment of $2,000 per acre for the agricultural easement.  They use the $500,000 in easement proceeds to purchase additional farmland for Lee.  John and Sue receive a federal income tax credit for the portion of the easement value they donated to qualify for the program, and carryover the amount until it is fully used, up to 15 years.

What are the drawbacks of agricultural easements?  There are challenges and drawbacks of agricultural easements, and we’ll discuss those in our next blog post.

Agricultural easements require legal and tax advice and careful planning.  Our short Q&A doesn’t address all of the nuances of agricultural easements.  It’s a big decision, and one that should align with current goals and estate and transition plans.  To determine if an agricultural easement works for your situation, seek the advice and planning assistance of knowledgeable legal and tax professionals.

Ohio contemplating temporary CAUV changes

Written by Jeffrey K. Lewis, Attorney and Program Coordinator, OSU Extension Income Tax Schools

Two separate, but very similar, pieces of legislation are working their way through the Ohio Legislature and could end up affecting your farmland’s current agricultural use value (“CAUV”). House Bill 187 (“HB 187”) and Senate Bill 153 (“SB 153”) both seek to adjust how property values are assessed in Ohio and some of those proposed changes specifically affect CAUV. 

Both proposed bills aim to make temporary adjustments to CAUV for farmland. These changes will impact farmland that undergo reappraisal or triennial updates in 2023, 2024, or 2025. The adjustment does not alter the CAUV formula itself but rather calculates a farm’s CAUV at its next reappraisal or update as the average between the CAUV for that year and the CAUV it would have if it were in a county that had reappraisals or updates in the two previous years.

The Ohio Legislature has provided the following example: “[C]onsider a farm located in a county that undergoes a reappraisal in 2023. If the formula were applied for that year, the farm’s CAUV would be $200 per acre. However, if the farm had been reappraised in 2022, its value would have been $190 per acre, and if it had been reappraised in 2021, its value would have been $180 per acre. Under the bill, the farm’s reappraisal value will be $190 per acre (the average of $180, $190, and $200).” 

Again, these proposals for CAUV adjustments are only temporary, and the current valuation rules will be reinstated starting in 2026. For example, if the farm mentioned above undergoes a triennial update in 2026, its value will be determined without averaging, following the currently existing rules. Furthermore, if the 2023 CAUV tables, which prescribe the per-acre value of each soil type, have already been published before the proposed legislation takes effect, the Ohio Department of Taxation must update these tables within 15 days after the bill becomes effective to reflect the changes introduced by the Legislature.

As of the morning of October 5, 2023, HB 187 has gone through committee and is ready to be voted on by the House. The Ohio Senate had its third hearing on SB 153 on October 3, 2023, but has yet to report the bill to the floor for a vote. Some County Auditors have come out in “indirect opposition” to both bills, arguing that the proposed legislation would create a logistical nightmare for tax billing purposes. Lastly, there are some differences between the two pieces of legislation – unrelated to CAUV – that would have to be worked out between the House and Senate before we have a final bill that could take effect. We will continue to monitor the situation and keep you up to date on any changes. 

What’s happening for ag at the Ohio Statehouse?

Despite the arrival of summer and continuing disagreements over the state budget, Ohio legislators have been working on several pieces of legislation relevant to Ohio agriculture.  All of the proposals remain in committee but may see further action after the budget bill process ends. Here’s a summary of the ag related proposals currently under consideration at the Statehouse.

Senate Bill 111 – Urban Agriculture

Senator Paula Hicks-Hudson (D-Toledo) targets barriers for farmers in urban settings in SB 111, which has had three hearings before the Senate Agriculture and Natural Resources Committee. OSU Extension, the Ohio Municipal League, and several farmers have testified in support of the  proposal, which contains three components:

• Establishes an Urban Farmer Youth Initiative Pilot Program to provide youth between the ages of six and eighteen living in urban areas with programming and support for farming and agriculture.  The bill would appropriate $250,000 over 2024 and 2025 for the pilot, to be administered by OSU Extension and Central State Extension.
• Exempts temporary greenhouses, such as hoop houses, from the Ohio Building Code, consistent with Ohio law’s treatment of other agricultural buildings and structures. 
• Codifies the Department of Taxation’s current treatment of separate smaller parcels of agricultural land under the same farming operation, which allows the acreages to be combined to meet the 10 acre eligibility requirement for Current Agricultural Use Valuation.

House Bill 64 – Eminent Domain

A proposal to make Ohio’s eminent domain laws more favorable to landowners remains on hold in the House Civil Justice Committee.  HB 64 is receiving more opposition than support, with dozens of parties testifying against it in its fourth hearing on May 23.  Read more about the proposal in our previous blog post.

House Bill 162 – Agriculture Appreciation Act

Rep. Roy Klopfenstein (R-Haviland) and Rep. Darrell Kick (R-Loudonville) introduced HB 162 on May 1 and it received quick and unanimous approval from the House Agriculture Committee on May 16.  The bill has not yet been introduced in the Senate.  The proposal would make several designations under Ohio law already recognized by federal law:

• March 21 as “Agriculture Day.”
• October 12 as “Farmer’s Day.”
• The week beginning on the Saturday before the last Saturday of February as “FFA Week.”
• The week ending with the second Saturday of March as “4-H Week.”

House Bill 166 – Temporary Agricultural Workers

A bill addressing municipal income taxes for H2-A agricultural workers has met opposition in the House Ways and Means Committee.  HB 166, sponsored by Rep. Dick Stein (R-Norwalk) would subject foreign agricultural workers’ income to municipal income taxes.  The current municipal tax base in Ohio is based on federal tax laws that exclude foreign agricultural worker pay from Social Security and Medicare taxes since the workers cannot use those programs, and HB 166 would remove that exclusion and add H2-A income to the municipal tax base.  The bill would also require employers to withhold the taxes for the municipality of the workers’ residences.  While municipal interests support the bill, Ohio Farm Bureau and agricultural interests testified against it in its third hearing on June 13.  Opponents argue that H2-A workers are not residents because they are “temporary,” that the proposal would have many potential adverse effects on how Ohio handles the H2-A program, and would hamper the ability of agricultural employers to use the H2-A program to hire employees.

House Bill 193 – Biosolid and biodigestion facilities  

Biosolid lagoons and biodigestion facilities would have new legal requirements and be subject to local regulation under a proposal sponsored by Rep. Kevin Miller (R-Newark) and Rep. Brian Lampton (R-Beavercreek).  HB 193 would grant county and township zoning authority over the lagoons and facilities, require a public meeting and county approval prior to seeking a facility permit from the Ohio EPA, require the Ohio EPA to develop rules requiring covers on new biosolid lagoons, and modify feedstock requirements for biodigestion facilities to qualify for Current Agricultural Use Valuation property tax assessment.  HB 193 had its first hearing before the House Agriculture Committee on June 13.

House Bill 197 – Community Solar Development   

A “community solar” proposal that did not make it through the last legislative session is back in a revised form.  HB 197 proposes to define and encourage the development of “community solar facilities,” smaller scale solar facilities that are directly connected to an electric distribution utility’s distribution system and that create electricity only for at least three “subscribers.”  The bill would establish incentives for placing such facilities on distressed sites and Appalachian region sites through a “Community Solar Pilot Program” and a “Solar Development Program.” Rep. James Hoops (R-Napoleon) and Sharon Ray (R-Wadsworth) introduced the bill on June 6, and it received its first hearing before the House Public Utilities Committee on June 21. “The goal of this legislation is to create a small-scale solar program that seeks to be a part of the solution to Ohio’s energy generation and aging infrastructure need,” stated sponsor Hoops.

House Bill 212 – Foreign ownership of property

 Ohio joins a movement of states attempting to limit foreign ownership of property with the introduction of HB 212, the Ohio Property Protection Act.  Sponsored by Representatives Angela King (R-Celina) and Roy Klopfenstein (R-Haviland), the proposal would prohibit foreign adversaries and certain businesses from owning real property in Ohio. The bill was introduced in the House on June 13 and has not yet been referred to a committee for review.

Excess Fertilizer Tax Strategy

Recently, there has been renewed interest in a tax strategy involving excess fertilizer in farmland.  The idea behind this strategy is to allocate a value to any residual fertilizer in farmland that was recently purchased or inherited.  The value of the fertilizer is then deducted to offset income.  While this strategy does have merit, it is considered by some tax professionals to be an aggressive tax strategy and caution should be used when implementing.

This strategy is centered on excess fertilizer being in the soil when farmland is acquired.  Excess fertilizer is that amount of fertilizer over and above the base nutrient levels.  The excess fertilizer is treated as a separate asset that can be distinguished from the soil.  A value is attributed to the excess fertilizer and that value is amortized based on the depletion rate of the fertilizer.  In essence, the new owner of the farmland is claiming they can put a verifiable value on the excess fertilizer and then amortize the value of the fertilizer.  

In a 1992 Technical Advice Memorandum (TAM), the IRS stated that to amortize the cost of fertilizer acquired with land, the landowner must establish the extent of the fertilizer, the value of the fertilizer and the depletion rate of the soil nutrients.  The burden is on the taxpayer seeking the deduction to prove the extent, value and depletion rate of the soil nutrients. It is important to note that a TAM is not legal authority and cannot be cited as authority, but it does potentially give insight as to the position the IRS would take in a similar matter.  

To help explain this concept, consider the following example:

Arthur applied $15,000 of fertilizer to his farm in November 2022 in anticipation of growing a crop in 2023.  In January 2023, Arthur dies unexpectedly, and his son Alex inherits the farm.  Alex is a farmer and intends to grow a corn crop on the farm in 2023.   Alex hires an agronomist who determines that all the fertilizer applied by Arthur is in excess of base nutrient levels and will be depleted over a three-year period.  Alex deducts the $15,000 of excess fertilizer in 2023, 2024 and 2025. 

If an attempt is made to deduct excess fertilizer, something like the above example is an ideal scenario.  The fertilizer applied is easily documented, no crop has yet been planted, and the agronomist can establish the depletion rate.  All aspects of the strategy should be carefully documented, including a report from the agronomist.  Peril awaits those who implement this strategy after they have applied additional fertilizer, grown a crop or can otherwise not properly document the excess fertilizer and/or depletion rate.

While the above example uses an inherited farm, the same strategy can be used with purchased farms.  Farms purchased at public auction may sell for a premium if excess fertilizer is present.  The premium, if properly documented, can potentially be deducted as excess fertilizer.  For farms purchased at private sale, the buyer and seller should address excess fertilizer in the purchase contract and declare a mutually agreeable amount and value.  If the buyer allocates a portion of the purchase price to excess fertilizer but the seller does not, the inconsistency in reporting could cause the IRS to deny the strategy.  

While identifying excess fertilizer can be a benefit to the buyer, it may be detrimental to the seller.  The seller should treat the excess fertilizer as a sale of fertilizer which is subject to ordinary income and thus possibly a higher tax rate.  Thus, the seller may be reluctant to participate in allocating a portion of the purchase price to excess fertilizer.  Also, if the buyer were to sell the land in the future, they will need to recapture the excess fertility as ordinary income.

As stated above, allocating a value to excess fertilizer in newly acquired farmland does have merit.  However, this strategy has never been formally approved by the IRS and, until it is, comes with the risk that the IRS could reject the deduction of excess fertilizer.  Additionally, states are not obligated to follow the IRS’ lead and one state, Minnesota, has a history of closely scrutinizing the strategy.  For anyone considering implementing this strategy, they should seek advice from their tax advisor to minimize risks of an adverse IRS ruling and employ an experienced agronomist or soil scientist to provide technical guidance on fertilizer levels and depletion rate.  In addition to seeking good, qualified advice, the landowner should be sure that every aspect of the strategy is well documented.

Note: this strategy can apply to any addition to the soil such as lime or micronutrients.

Ohio legislature passes statutory farm lease termination and beginning farmer bills

Bills establishing new legal requirements for landowners who want to terminate a verbal or uncertain farm lease and income tax credits for sales of assets to beginning farmers now await Governor DeWine’s response after passing in the Ohio legislature this week.  Predictions are that the Governor will sign both measures.

Statutory termination requirements for farm leases – H.B. 397

Ohio joins nine other states in the Midwest with its enactment of a statutory requirement for terminating a crop lease that doesn’t address termination.  The legislation sponsored by Rep. Brian Stewart (R-Ashville) and Rep. Darrell Kick (R-Loudonville) aims to address uncertainty in farmland leases, providing protections for tenant operators from late terminations.

The bill states that in either a written or verbal farmland leasing situation where the agreement between the parties does not provide for a termination date or a method for giving notice of termination, a landlord who wants to terminate the lease must do so in writing by September 1.  The termination would be effective either upon completion of harvest or December 31, whichever is earlier.  Note that the bill applies only to leases that involve planting, growing, and harvesting of crops and does not apply to leases for pasture, timber, buildings, or equipment and does not apply to the tenant in a leasing agreement.

The beginning farmer bill – H.B. 95

A long time in the making, H.B. 95 is the result of a bi-partisan effort by Rep. Susan Manchester (R-Waynesfield) and Rep. Mary Lightbody (D-Westerville).  It authorizes two types of tax credits for “certified beginning farmer” situations. The bill caps the tax credits at $10 million, and sunsets credits at the end of the sixth calendar year after they become effective.

The first tax credit is a nonrefundable income tax credit for an individual or business that sells or rents CAUV qualifying farmland, livestock, facilities, buildings or machinery to a “certified beginning farmer.”  A late amendment in the Senate Ways and Means Committee reduced that credit to 3.99% of the sale price or gross rental income.  The bill requires a sale credit to be claimed in the year of the sale but spreads the credit amount for rental and share-rent arrangements over the first three years of the rental agreement.  It also allows a carry-forward of excess credit up to 7 years.  Note that equipment dealers and businesses that sell agricultural assets for profit are not eligible for the tax credit, and that an individual or business must apply to the Ohio Department of Agriculture for tax credit approval.

The second tax credit is a nonrefundable income tax credit for a “certified beginning farmer” for the cost of attending a financial management program.  The program must be certified by the Ohio Department of Agriculture, who must develop standards for program certification in consultation with Ohio State and Central State.  The farmer may carry the tax credit forward for up to three succeeding tax years.

Who is a certified beginning farmer?  The intent of the bill is to encourage asset transition to beginning farmers, and it establishes eligibility criteria for an individual to become “certified” as a beginning farmer by the Ohio Department of Agriculture.  One point of discussion for the bill was whether the beginning farmer credit would be available for family transfers.  Note that the eligibility requirements address this issue by requiring that there cannot be a business relationship between the beginning farmer and the owner of the asset. 

An individual can become certified as a beginning farmer if he or she:

• Intends to farm or has been farming for less than ten years in Ohio.
• Is not a partner, member, shareholder, or trustee with the owner of the agricultural assets the individual will rent or purchase.
• Has a household net worth under $800,000 in 2021 or as adjusted for inflation in future years.
• Provides the majority of day-to-day labor and management of the farm.
• Has adequate knowledge or farming experience in the type of farming involved.
• Submits projected earnings statements and demonstrates a profit potential.
• Demonstrates that farming will be a significant source of income.
• Participates in a financial management program approved by the Department of

Agriculture.

• Meets any other requirements the Ohio Department of Agriculture establishes through rulemaking.

We’ll provide further details about these new laws as they become effective.   Information on the statutory termination bill, H.B. 397, is here and information about the beginning farmer bill, H.B. 95, is here.  Note that provisions affecting other unrelated areas of law were added to both bills in the approval process.

The Ag Law Roundup

It’s time to round up a sampling of legal questions we’ve received the past month or so.  The questions effectively illustrate the breadth of “agricultural law,” and we’re happy to help Ohioans understand its many parts.  Here’s a look at what has come our way:

I’m considering a carbon credit agreement.  What should I look for?   Several types of carbon credit agreements are now available to Ohio farmers, and they differ from one another so it’s good to review them closely and with the assistance of an attorney and an agronomist.  For starters, take time to understand the terminology, make sure you can meet the initial eligibility criteria, review payment and penalty terms, know what types of practices are acceptable, determine “additionality” requirements for creating completing new carbon reductions, know the required length of participation and how long the carbon reductions must remain in place, understand how carbon reductions will be verified and certified, be aware of data ownership rights, and review legal remedy provisions.  That’s a lot!  Read more about each of these recommendations in our blog post on “Considering Carbon Farming?”

I want to replace an old line fence.  Can I remove trees along the fence when I build the new fence?   No, unless they are completely on your side of the boundary line.  Both you and your neighbor co-own the boundary trees, so you’ll need the neighbor’s permission to remove them.  You could be liable to the neighbor for the value of the trees if you remove them without the neighbor’s approval, and Ohio law allows triple that value if you remove them against the neighbor’s wishes or recklessly harm the trees in the process of building the fence.  You can, however, trim back the neighbor’s tree branches to the property line as long as you don’t harm the tree.  Also, Ohio’s line fence law in ORC 971.08 allows you to access up to 10 feet of the neighbor’s property to build the fence, although you can be liable if you damage the property in doing so.

I want to sell grow annuals and sell the cut flowers.  Do I need a nursery license?  No.  Ohio’s nursery dealer license requirement applies to those who sell or distribute “nursery stock,” which the law defines as any “hardy” tree, shrub, plant, bulb, cutting, graft, or bud, excluding turf grass.  A “hardy” plant is one that is capable of surviving winter temperatures. Note that the definition of nursery stock also includes some non-hardy plants sold out of the state.  Because annual flowers and cuttings from those flowers don’t fall into the definition of “nursery stock,” a seller need not obtain the nursery dealer license.

Must I collect sales tax on cut flowers that I sell?  Yes.  In agriculture, we’re accustomed to many items being exempt from Ohio’s sales tax.  That’s not the case when selling flowers and plants directly to customers, which is a retail sale that is subject to the sales tax.  The seller must obtain a vendor’s license from the Ohio Department of Taxation, then collect and submit the taxes regularly.  Read more about vendor’s licenses and sales taxes in our law bulletin at this link.

I’m an absentee landowner who rents my farmland to a tenant operator.  Should I have liability insurance on the land?  Yes.  A general liability policy with a farm insurer should be affordable and worth the liability risk reduction.  But a few other steps can further minimize risk.  Require your tenant operator to have liability insurance that adequately covers the tenant’s operations, and include indemnification provisions in your farm lease that shift liability to the tenant during the lease period.  Also consider requiring your tenant or hiring someone to do routine property inspections, monitor trespass issues, and ensure that the property is in a safe condition. 

My neighbor and I both own up to the shoreline on either side of a small lake–do I have the right to use the whole lake?  It depends on where the property lines lay and whether the lake is connected to other waters. If the lake is completely surrounded by private property and not connected to other “navigable” waters, such as a stream that feeds into it, the lake is most likely a private water body.  Both of you could limit access to your side of the property line as it runs through the lake.  You also have the legal right to make a “reasonable use” of the water in the lake from your land, referred to as “riparian rights.”  You could withdraw it to water your livestock, for example; but you cannot “unreasonably” interfere with your neighbor’s right to reasonably use the water.   The law changes if the lake is part of a “navigable” waterway.  It is then a “water of the state” that is subject to the public right of navigation.  Others could float on and otherwise navigate the water, and you could navigate over to your neighbor’s side.  Public users would not have the riparian rights that would allow them to withdraw and use the water, however, and would be trespassing if they go onto the private land along the shore.

If I start an agritourism activity on my farm, will I lose my CAUV status?  No, not if your activities fit within the legal definition of “agritourism.”  Ohio law states in ORC 5713.30(A)(5) that “agritourism” activities do not disqualify a parcel from Ohio’s Current Agricultural Use Valuation (CAUV) program. “Agritourism,” according to the definition in ORC 901.80, is any agriculturally related educational, entertainment, historical, cultural, or recreational activity on a “farm” that allows or invites members of the general public to observe, participate in, or enjoy that activity.  The definition of a “farm” is the same as the CAUV eligibility—a parcel devoted to commercial agricultural production that is either 10 acres or more or, if under 10 acres, grosses $2500 annually from agricultural production.  This means that land that is enrolled in the CAUV program qualifies as a “farm” and can add agritourism activities without becoming ineligible for CAUV.

Send your questions to aglaw@osu.edu and we’ll do our best to provide an answer.  Also be sure to check out our law bulletins and the Ag Law Library on https://farmoffice.osu.edu, which explain many of Ohio’s vast assortment of agricultural laws.

The Ag Law Harvest

By: Jeffrey K. Lewis, Attorney and Research Specialist, OSU Agricultural and Resource Law Program

Did you know that the loudest land animal is the howler monkey?  The howler monkey can produce sounds that reach 140 decibels.  For reference, that is about as loud as a jet engine at take-off, which can rupture your eardrums.  

Like the howler monkey, we are here to make some noise about recent agricultural and resource law updates from across the country.  This edition of the Ag Law Harvest brings you court cases dealing with zoning ordinances, food labeling issues, and even the criminal prosecution of a dairy farm.  We then look at a couple states proposing, or disposing, of legislation related to agriculture.  

A zoning ordinance has Michigan landowners hogtied.  The Michigan Supreme Court recently ruled that Michigan’s 6-year statute of limitations does not prevent a township from suing a landowner for alleged ongoing zoning violations, even if the start of landowner’s alleged wrongdoing occurred outside the statute of limitations period.  

Harvey and Ruth Ann Haney (“Defendants”) own property in a Michigan township that is zoned for commercial use.  Defendants began raising hogs on their property in 2006.  Defendants started with one hog and allegedly grew their herd to about 20 hogs in 2016.  In 2016, Fraser Township (“Plaintiff”) filed suit against Defendants seeking a permanent injunction to enforce its zoning ordinance and to prevent Defendants from raising hogs and other animals that would violate the zoning ordinance on their commercially zoned property.  Defendants filed a motion to dismiss and argued that Plaintiff’s claims were barred because of Michigan’s 6-year statute of limitations.  A statute of limitations is a law that prevents certain lawsuits from being filed against individuals after a certain amount of time has passed.  In Ohio, for example, if someone were to be injured in a car accident, they would only have 2 years to bring a personal injury claim against the person who caused the accident.  That’s because Ohio has passed a law that mandates most personal injury claims to be brought within 2 years of the date of injury.  

In the Michigan case, Defendants argued that because their first alleged wrongdoing occurred in 2006, Plaintiff could not file their lawsuit against the Defendants in 2016.  A trial court disagreed with Defendants and denied their motion to dismiss.  Defendants took the motion up to the Michigan Court of Appeals, and the Court of Appeals found that Plaintiff’s claim was barred because of the 6-year statute of limitations.  Plaintiff appealed to the Michigan Supreme Court, which overturned the Court of Appeals’ decision and held that Plaintiff’s claim was not barred.  The Michigan Supreme Court reasoned that the presence of the hogs constitutes the alleged unlawful conduct of the Defendants, and that unlawful conduct occurred in 2006 and has occurred almost every day thereafter.  The court concluded that because Defendants unlawful conduct was ongoing after 2006, Plaintiff’s claims were not barred by the statute of limitations.  The case now goes back to the trial court to be tried on the merits of Plaintiff’s claims against Defendants. 

Where there’s smoke, there’s fire.  Family Dollar Stores, Inc. (“Family Dollar”) has found itself in a bit of nutty situation.  Plaintiff, Heather Rudy, has filed a class action lawsuit against Family Dollar, alleging that Family Dollar has misled her and other consumers by marketing its Eatz brand Smoked Almonds as “smoked.”  Plaintiff asserts that Family Dollar is being deceptive because its Smoked Almonds are not smoked over an open fire, but instead flavored with a natural smoke flavoring.  Plaintiff’s claims against Family Dollar include violating the Illinois Consumer Fraud and Deceptive Business Practices Act (“ICFA”); breaches of express warranty and implied warranty of merchantability; violation of the Magnuson-Moss Warranty Act; negligent misrepresentation; fraud; and unjust enrichment.  

Family Dollar filed an early motion to dismiss, arguing that Plaintiff has not stated a claim for which relief can be granted.  A federal district court in Illinois dismissed some of Plaintiff’s claims but ruled that some claims against Family Dollar should be allowed to continue.  Plaintiff’s claims for breaches of warranty, violation of the Magnuson-Moss Warranty Act, negligent misrepresentation, and fraud were all dismissed by the court.  The court did decide that Plaintiff’s claims under ICFA unjust enrichment should stay.  The court reasoned that Plaintiff’s interpretation that Family Dollar’s almonds would be smoked over an open fire are not unreasonable.  Moreover, the court recognized that nothing on the front label of Family Dollar’s Smoked Almonds would suggest, to consumers, that the term “smoked” refers to a flavoring rather than the process by which the almonds are produced.  The court even pointed out that competitors’ products contain the word “flavored” on the front of similar “smoked” products.  Therefore, the court concluded that Plaintiff’s interpretation of Family Dollar’s Smoked Almonds was not irrational and her claims for violating the ICFA should continue into the discovery phase of litigation, and possibly to trial.  

Undercover investigation leads to criminal prosecution of Pennsylvania dairy farm.  A Pennsylvania Court of Appeals (“Court of Appeals”) recently decided on Animal Outlook’s (“AO”) appeal from a Pennsylvania trial court’s order dismissing AO’s petition to review the decision of the Franklin County District Attorney’s Office (“DA”) to not prosecute a Pennsylvania dairy farm (the “Dairy Farm”) for animal cruelty and neglect.  An undercover agent for AO held employment at the Dairy Farm and captured video of the condition and treatment of animals on the farm, which AO claims constitutes criminal activity under Pennsylvania’s animal cruelty laws.  

AO compiled a report containing evidence and expert reports documenting the Dairy Farm’s alleged animal cruelty and neglect.  AO submitted its report to the Pennsylvania State Police (“PSP”) in 2019.  The PSP conducted its own investigation which lasted for over a year, and in March 2020, issued a press release indicating that the DA would not prosecute the Dairy Farm.  

In response, AO drafted private criminal complaints against the Dairy Farm and submitted those to the local Magisterial District Judge.  The local Magisterial Judge disapproved all of AO’s complaints and concluded that the complaints “lacked merit.”  AO then filed a petition in a Pennsylvania trial court to review the Magisterial Judge’s decision.  The trial court dismissed AO’s petition and concluded that the DA correctly determined “that there was not enough evidence, based upon the law, to initiate prosecution against any of the Defendants alleged in the private criminal complaints.”  AO appealed the trial court’s decision to the Court of Appeals which ended up reversing the trial court’s decision.    

The Court of Appeals concluded that the trial court failed to view the presented evidence through a lens that is favorable to moving forward with prosecution and the trial court failed to consider all reasonable inferences that could be made on the evidence.  The Court of Appeals observed that the trial court made credibility determinations of the evidence by favoring the evidence gathered by PSP over the evidence presented by AO.  The Court of Appeals noted that a trial court’s duty is to determine “whether there was evidence proffered to satisfy each element of an offense, not to make credibility determinations and conduct fact-finding.” Additionally, the Court of Appeals found that the trial court did not do a complete review of all the evidence and favored the evidenced obtained by PSP over the evidence presented by AO.  The Court of Appeals determined that had the trial court reviewed all the evidence, it would have found that AO provided sufficient evidence to establish prima facie cases of neglect and animal cruelty, which would have provided the legal basis for the DA’s office to prosecute the claims.  

Lastly, the DA argued that no legal basis for prosecution exists because the Dairy Farm is protected by the normal agricultural operations exemption to Pennsylvania’s animal cruelty laws.  However, the Court of Appeals found that the conduct of the Dairy Farm, as alleged, would fall outside the normal agricultural operations exemption because AO’s report demonstrates that the Dairy Farm’s practices were not the dairy industry norm.    

Ultimately the Court of Appeals found that AO’s private criminal complaints did have merit and that the DA had enough evidence and a legal basis to prosecute AO’s claims.  The Court of Appeals remanded the trial court’s decision and ordered that the DA to go ahead and prosecute the Dairy Farm on its alleged animal cruelty violations.  

Wyoming fails to pass legislation limiting what can be considered agricultural land.  The Wyoming House of Representatives struck down a recent piece of legislation looking to increase the threshold requirement to allow landowners the ability to classify their land as agricultural, have their land appraised at an agricultural value, and receive the lower tax rate for agricultural land.  Current Wyoming law classifies land as agricultural if: (1) the land is currently being used for an agricultural purpose; (2) the land is not part of a patted subdivision; and (3) the owner of the land derived annual gross revenue of $500 or more from the marketing of agricultural products, or if the land is leased, the lessee derived annual gross revenues of $1,000 or more from the marketing of agricultural products.  

Wyoming House Bill 23 sought to increase the threshold amount of gross revenues derived from the marketing of agricultural products to $5,000 for all producers.  The Wyoming Farm Bureau Federation and Wyoming Stock Growers associations supported the bill.  Proponents of the bill argued that the intent of agricultural land appraisals is to support commercial agriculture, not wealthy landowners taking advantage of Wyoming’s tax laws.  Opponents of the bill argued that House Bill 23 hurt small agricultural landowners and that the benefits of the bill did not outweigh the harms.  House Bill 23 died with a vote of 34-25, failing to reach the 2/3 approval for bills to advance.  

Oregon introduces legislation relating to overtime for agricultural workers.  Oregon House Bill 4002 proposes to require agricultural employers to pay all agricultural employees an overtime wage for time worked over 40-hours in a workweek.  House Bill 4002 does propose a gradual phase-in of the overtime pay requirements for agricultural employees.  For the years 2023 and 2024, agricultural employees would be entitled to overtime pay for any time worked over 55 hours in a workweek.  For 2025 and 2026, the overtime pay requirement kicks in after 48 hours.  Then in 2027, and beyond, agricultural employers would be required to pay an overtime pay rate to employees that work more than 40 hours in a workweek.