Tax savings through biofuels investments
By Jason Orr

The New Generation Cooperative Tax Credit is a flexible tool for farm investors.

As you enter Audrain County, Mo., you see a sign that reads, “Biofuel Capital of Missouri.” Many of us have helped contribute to this distinction by investing in biofuel production plants. In fact, many of us were encouraged by state-generated tax credits. Because these new-generation processing facilities turn Missouri agricultural commodities and agricultural products into value-added goods and provide substantial benefits to Missouri’s agricultural producers and workers, the State of Missouri issues New Generation Cooperative Incentive Tax Credits.
But what exactly do these credits do for you and what if you cannot take advantage of them in the time frame allowed?
Let’s look at a couple scenarios you might face as a farmer-investor in a new-generation cooperative.
For purposes of this article, it is essential to distinguish between credits and deductions. The definition of a credit is a direct reduction of taxes owed, whereas a deduction will only reduce your taxable income. Generally a credit has a value equal to the amount of the credit and will offset your tax liability dollar for dollar. In layman’s terms, the Missouri tax credits are basically Missouri Monopoly money used to pay Missouri income taxes.

Example: Corn producer Larry has a total Missouri tax liability for 2007 of $1,500. If Larry had invested in a new-generation cooperative and received a $1,500 Missouri tax credit, he would owe nothing to the State of Missouri ($1,500 tax liability minus $1,500 tax credit). On the other hand, if the $1,500 were treated as a Missouri income tax deduction (other examples of a deduction are seed or fertilizer purchases) and not as a credit, this would have only saved Larry $90 ($1,500 in deductions multiplied by 6 percent Missouri income tax rate).
Generally these tax credits must be used by their owner to offset the owner’s tax liabilities (tax owed on their Missouri income tax return) due in the tax year in which the investment is made.
Any remaining credits may be carried back to satisfy the State tax liability of the owner of the certificate that was due during each of the 3 previous years (for example, to obtain a refund of previously paid taxes) and may be carried forward to any of the subsequent 5 tax years after the investment is made.

Example: Larry paid the state of Missouri $4,000 in state income taxes for the 2004, 2005 and 2006 tax years. During 2007, Larry invested in Biorefinery Inc. and received a $5,000 Missouri new generation tax credit. Larry now has the option of amending his previous 3 years’ tax returns (2004 through 2006) and receiving a refund check in the mail for $4,000. Larry could also reduce what he owes the State of Missouri for 2007 by the remaining $1,000 tax credit.
But what happens if you cannot use these credits in the designated time frame? The tax credits may be transferred, sold or assigned to whomever you choose by filing Missouri Form R. You even have a choice as to whether you sell a portion or the entire credit. If you choose to sell your tax credit, the payment you receive is tax free. However, your investment in the biofuels plant (cost basis) will be reduced by the sales price of your tax credit.

Example: Tony invested $30,000 in the Oil For Tomorrow Biofuels, LLC and received a $5,000 New Generation tax credit. Tony decided to sell his New Generation tax credit to Cooper Insurance Agency for $5,000 (no gain recognized in the year of sale for the tax credit). Ten years later, when Tony’s son Nate was ready to start college, Tony decided to sell his shares in the Oil for Tomorrow Biofuels, LLC for $40,000. Tony would then recognize a $15,000 long-term capital gain (sales price $40,000 less $30,000 purchase price plus sales price of tax credit $5,000).
Currently, there are a number of organizations purchasing tax credits for 100 percent of their value.
The above is intended only as an overview and should be discussed with your tax advisers in detail before being implemented. Furthermore, there are several other opportunities available for individuals, farmers and businesses to save Missouri income taxes, so ask your tax adviser for other tax planning techniques.

Jason Orr is a CPA for Moore, Horton & Carlson, P.C. in Mexico, Mo

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