Now that the New Year’s celebrations are behind us and 2018 is a memory, it’s time to look forward to tax filing season.
The Tax Cuts and Jobs Act of 2017 made major changes to the tax code, most of which you’ll see when you file your 2018 tax returns.
For farmers, there are many changes you should be aware of before you sit down with your tax accountant.
Here are six ways tax reform may affect you:
1. Section 199A, or the ‘20% deduction’
If you operate your farm as anything other than a C-corporation and are unaware of how Section 199A will affect your business, make sure it is the first thing you talk about with your tax professional. This deduction, which essentially replaces the old Domestic Production Activities Deduction, is brand new and quite complicated.
Under section 199A, there are limitations that may affect whether you receive the full benefit. Some items that affect 199A include wages, taxable income and the basis of assets. Furthermore, not all rental arrangements will qualify for the deduction and some will require special elections made on the tax return.
The 199A deduction can be substantial and does have a multiyear impact. This will require careful analysis and tax planning to optimize the deduction not only for this year, but in future years.
2. C-corporation changes
C-corporations do not qualify for the 20% deduction. Rather, they are now taxed at a flat 21% corporate rate.
While this is a tax reduction for most C-corporations, many farming C-corporations previously kept taxable income below $50,000 and were taxed at a 15% rate. So, if you fall into that category and are now facing that 40% tax rate increase, it may make sense to discuss converting to an S-corporation, if possible.
Talk to your tax professional to see the ramifications of filing as a C-corporation or S-corporation.
3. Immediately write off purchases
If you made any capital purchase such as breeding livestock, farm equipment, or a single-purpose structure such as a milking parlor (up to $1 million), you’ll be able to immediately write-off that purchase under the new Section 179. The phase out on this provision doesn’t kick in until a farm reaches $2.5 million in purchases.
4. Bonus depreciation and equipment depreciation
Farmers can write off 100% of qualified property purchased from Sept. 27, 2017, to 2022, when a phase-down occurs. This includes new and used property purchased or constructed, as well as plants bearing fruits and nuts. But keep in mind that not all states conform to this federal bonus.
5. Like-kind exchange limits
Like-kind exchanges are now limited to real property. For example, farmers can still swap land for other land tax free, but equipment trade-ins will no longer be a tax-free event.
6. $25-million interest deduction limitation
Businesses, including farmers, will be limited on deducting interest expense when their taxable income exceeds $25 million. Taxable income is computed without regard to certain adjustments, such as business interest expense and net operating losses.
If applicable, the interest deduction cannot be more than the business interest income, plus 30% of adjusted taxable income. Farmers may use an election to avoid that limitation; the catch is that a slower depreciation method will have to be used on farm property with a recovery period of 10 years or more.
Where you live is important
Not every change to the tax code will affect taxpayers with respect to state income tax.
For example, the Section 199A deduction will not be available to farmers in Farm Credit East’s six-state territory — Connecticut, Maine, Massachusetts, New Hampshire, New Jersey, New York and Rhode Island — due to a function of how those states derive their taxable income.
Likewise, every Northeast state that has an estate tax has a lower estate threshold than the current $11.18 million per person that exists at the federal level.
Also, New York state taxpayers may now itemize at the state level even if they do not itemize federally. So, if you live in New York, keep your receipts!
Connecticut recently enacted a tax on the state’s flow-through entities. This will affect all Connecticut partnerships, including LLCs taxed as partnerships and S-corporations.
Source: Dario Arezzo, Farm Progress
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