Farmers to Reap Benefits from Provisions of the Tax Cuts and Jobs Act (TCJA)

Kristi L. Jeffres, CPA, MBA, MT (May, 2018)

There is often uneasiness regarding the unknown surrounding tax reform.  Business owners are left wondering if changes will impact them in a positive way.  It appears that changes made by the recent passing of the TCJA may create better opportunities for farmers.  Some of these changes are listed below.

Depreciation

Depreciation is one area of the recent tax law changes that provide farmers multiple tax planning opportunities.  

  • Section 179 Expense: Internal Revenue Code Section 179 allows taxpayers to immediately write off the cost of an asset, rather than capitalizing it. Prior to the TCJA, taxpayers could expense up to $510,000 of qualifying property for the year, subject to phase-outs at $2,030,000 of qualifying purchases for the year. Beginning in 2018, taxpayers may immediately expense up to $1,000,000 of qualifying property, with the phase-out increasing to $2,500,000.  Qualifying purchases include machinery and equipment, livestock, and single-purpose structures (such as for livestock, milking parlors, and horticulture structures). While New York State ("NYS") does allow Section 179 expense, it is important to remember that an asset will not qualify for the NYS Investment Tax Credit if Section 179 is claimed for federal purposes.
  • Bonus depreciation: As of September 28, 2017, bonus depreciation increased from a 50% deduction to a 100% deduction on qualifying property through 2022. Qualified property may now be new or used.  This includes machinery and equipment, barns (single purpose and general-purpose), land improvements (including tiling), as well as plants bearing fruits and nuts. Bonus depreciation is still not allowed under NYS law.
  • Depreciable lives & methods: For taxpayers not claiming bonus depreciation or the expensing under Section 179, there is a change to the depreciable lives and methods on farm assets that increases depreciation expense in the earlier years of an assets life. Prior to the TCJA, property used in a farming business was required to be depreciated using the 150% declining balance method. Beginning in 2018, farmers may utilize the 200% declining balance method. In addition, purchases of new farm machinery and equipment will have a 5 year depreciable life, rather than 7 years. However, grain bins and fences will remain at a 7 year depreciable life.

Domestic Productions Activities Deduction ("DPAD")

  • The DPAD many farmers have taken advantage of in the past has been repealed. Fortunately, a new Qualified Business Income ("QBI") Deduction has been enacted. There are some key differences between the old DPAD deduction and the new QBI Deduction:
    • The DPAD was only available to taxpayers who produced or manufactured goods in the United States. The QBI deduction is available to all taxpayers except C Corporations, with no requirement for producing or manufacturing goods in the United States.
    • The DPAD equaled 9% of the lessor of qualified production activities income or the adjusted gross income for individuals, trusts, and estates. It was also limited to 50% of taxable wages directly related to production activities.
    • The new QBI deduction is generally limited to the lesser of 20% of the taxpayer's share of qualified business income from a qualified trade or business, or 50% of the taxpayer's share of W-2 wages attributable to the qualified trade or business.
    • The DPAD deduction was a deduction to arrive at AGI, while the new QBI deduction is an adjustment made to arrive at taxable income after taking itemized deductions.
    • The QBI deduction will not reduce capital gains or qualified dividend income.

Net Operating Losses ("NOLs"): Historically, qualified farming businesses could carryback NOLs five years and forward up to 20 years. Under the TCJA, NOLs generated from farming activities are allowed a two year carryback and may be carried forward indefinitely. NOLs will be limited to 80% of taxable income.

Estate Tax Exemption: An increase to the estate tax exemption provides advantages to farming families looking at succession planning. An individual now has an $11.2 million estate tax exemption (married couples get $22.4 million), which is nearly double the exemptions in effect prior to the TCJA.

Tax Rates: C corporations are now subject to a flat 21% tax rate, rather than a tiered structure with a top rate of 35%. Individual income tax rates remain at graduated rates. Although the lowest individual tax bracket remains nearly unchanged, the top rate staring in 2018 is 37% as opposed to 39.6% in 2017.

New York State Tax Credit: Beginning in 2017 New York State is offering eligible farmers a refundable credit of $250 per eligible farm employee that works 500 hours or more per tax year. Eligible farm employees include H2A workers, but exclude executive officers. The credit is scheduled to increase gradually through 2021.

Like Kind Exchanges: Beginning in 2018 like-kind exchange treatment is limited to real property (land and buildings) that is not held primarily for sale.  Equipment can no longer be traded-in tax-free.

Breweries, distilleries, and wineries: Exciting news is that for the first time in over 80 years there is a reduction in federal excise taxes.  There is a two-year excise tax reduction for alcohol manufacturers effective January 1, 2018, through December 31, 2019.  Sparkling wine producers are now included in the expanded credit against the wine excise tax.  Another change is to the uniform capitalization rules that used to require the inclusion of interest expense in the total cost of inventory when the production period (including aging) exceeded two years. Effective January 1, 2018, through December 31, 2019, interest applicable to the production period without regard to the aging period can be deducted, instead of capitalized.

It appears the new tax provisions should provide the farming community with significant benefits for years to come.  Please feel free to contact your Dermody, Burke & Brown tax advisor to further discuss any questions you may have.

 

The information reflected in this article was current at the time of publication.  This information will not be modified or updated for any subsequent tax law changes, if any.