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Important Tax Changes to Factor into 2018 Filings

As producers prepare to file federal income taxes for the first time under the Tax Cuts and Jobs Act, we asked Paul Neiffer, CPA and principal at CliftonLarsonAllen LLP, to revisit the law and its potential impact on farming and ranching operations.

His original “Six Questions to Ask Your Tax Advisor” serve as a starting point for understanding the new law. In the months since, more details about the law have emerged. Below, Neiffer outlines additional features to discuss with your tax advisor as you prepare your 2018 tax return:

Bonus depreciation. The ability to deduct 100 percent of depreciable property, including equipment, tiling, grain bins, livestock buildings and used machinery, might seem attractive. But use caution in offsetting all your income.

Income. To take advantage of some deductions, such as the 199A Qualified Business Income deduction and child tax credits, you must report some income. The 199A has increased in complexity. Be aware of what qualifies as business income under the new law (e.g., the treatment of rental income, crop share, guaranteed wages/income). Neiffer said some producers are pulling deferred grain sales into 2018 to create income.

Business Losses. Agricultural operations remain the only businesses that can carry excess business losses back. But the timeframe has shrunk from five to two years. By comparison, producers can carry losses forward over an unlimited number of years. Whether you carry back or forward, these losses can offset only 80 percent of taxable income. A limit of $250,000 (single) or $500,000 (married) applies.

Self-employment tax. Factor self-employment taxes into decisions because they qualify you for Social Security and federal disability and retirement benefits, Neiffer said. Many farmers will show losses on their 2018 returns.

“Using the optional self-employment tax approach means you pay about $800 in self-employment tax and qualify with four credits for Social Security retirement and disability benefits,” he said. “This is especially important for young producers starting out.”

Kid wages vs. gifts of grain. Wages of up to $6,500 for children used to be exempt from federal taxes. Under the new law, wages of up to $12,000 for children are exempt. By comparison, gifts valued at more than $5,000 may increase a child’s tax liability under the new law. Wages also qualify for deposit into a Roth IRA, which could represent a substantial benefit by retirement age.

Ownership structure. If you consider a change of business ownership structure, be sure you and your advisers think through how that will impact other aspects of your business, including income tax, self-employment tax, FSA and estate taxes. For instance, the ARC and PLC programs are subject to a $125,000 limit. For general partnerships that applies to each member; LLCs and S corporations have one limit regardless how many people are involved. In addition to changes in tax laws, producers also need to be mindful of provisions in the recently passed Farm Bill, which are in effect through 2025. The definition of family, for example, was broadened to include nephews, nieces and first cousins.

If you do change business structures, remember to update records at FSA and RMA in a timely manner.

“Overall, we think it may be prudent to hold off any major changes in structure until you better understand all the implications of this tax law,” Neiffer said.

Filing date. Many farmers will have trouble filing their return by March 1, especially if they operate in “nonconforming” states, meaning their state tax laws don’t align to the fed’s. The fact that IRS has not completed some necessary forms also poses challenges to timely filing.

Neiffer said operators might consider pushing their filing deadline to April 15. To do this, producers have until January 15 to pay the lesser of two options: 100 percent of last year’s taxes or two-thirds of this year’s estimated taxes. Miss this deadline and you will be assessed 6 percent of your estimated taxes as of January 15.

Don’t procrastinate. This is a year when the help of a tax professional will be valuable. Don’t delay in seeking advice.

6 Questions to Ask Your Tax Professional

If you’re trying to make sense of the updated tax laws, you’re not alone. The 2017 tax reform, technically called the Tax Cuts and Jobs Act, presents changes and opportunities.

We are not tax experts and would never recommend that you manage your operation based solely on taxes. But as agriculture’s most valued financial partner, we want to help you reach decisions that assure your business is structured and operating in the best way possible. So we asked Paul Neiffer, CPA with CliftonLarsonAllen LLP, to help us identify key changes in the law that may affect you.

Please use these questions as a tool to seek advice from your own tax professional. We’ve also provided some background on each. Finally, note that many of these changes are not permanent in the law, so be sure to ask how current timelines affect the decisions you make today.

What is the optimum tax bracket for my operation?

Here are the major changes:

  • Individual rates have been reduced and top out at a lower amount, as illustrated in the graph below.2018 Tax Brackets and Rates
  • Deduction of personal state and local income, sales, and real estate taxes is limited to $10,000 on personal tax returns. This limitation does not apply to C corporations.
  • The standard deduction increased to $12,000 (individual) and $24,000 (married couples filing jointly).
  • The child tax credit doubled to $2,000.

What business structure is right for my operation?

The top corporate tax rate is now a flat 21%. This rate may be an increase for some producers, whose effective corporate tax rate may have been 15%. Their overall tax may be lower, however, based on other new deductions.

How fast should I depreciate assets?

New and used farm assets (other than land) can now be fully depreciated in the year of purchase using 100% bonus depreciation. This includes improvements. So if a farmer purchases a farm with buildings, wells, and fences, those features are now 100% deductible at the time of purchase.

Section 179 is now available up to $1 million.

Is it better to sell or trade my farm equipment?

Section 1031 tax-deferred exchanges now are allowed only for real property (land and buildings). Previously, if a farmer traded a fully-depreciated $40,000 tractor for a $100,000 tractor, the new tractor’s depreciation basis would be the difference ($60,000). Now, you would have to claim $40,000 of income and then be able to fully expense the $100,000 tractor through bonus depreciation or Section 179.

Are there changes to how net operating losses are handled?

There is a $500,000 limit on net business losses. Up to $500,000 of farm business losses can be carried back a maximum of two years or the loss can be carried forward. Losses can be carried forward an unlimited number of years, unlike previous law that limited carry forward to 20 years. Non-farm losses can only be carried forward. Losses can only offset 80% of taxable income on carryback or carryforward. Finally, losses do not reduce self-employment income tax.

What happens to fringe benefits, like health insurance, meals, and employee lodging?

Meals provided to employees are now only 50% deductible, but remain tax-free for employees and 100% deductible for owners of a C corporation. After 2025, there is no deduction for meals.

C corporation employers are still permitted to deduct the value of lodging provided to employees. It remains a tax-free benefit to the employee of a C corporation.

Health insurance for S corporation owners and partners remains deductible.

There are many more questions to ask, but these should get you started. For some additional questions, click for the detailed list.

Check with your Frontier Farm Credit financial officer to learn about the wide range of finance and lease options that fit the needs of your operation.