Top 5: Tax Bill Impacts to Ag Industry

Published online: Mar 27, 2018 Top Five Jeffrey W Siler, Wipfli LLP
Viewed 645 time(s)

This article appears in the April 2018 issue of Potato Grower

On Dec. 22, President Trump signed into law the Tax Cuts and Jobs Act (TCJA). Some argue this is the most significant overhaul to our tax system in more than 30 years. As you might expect, the new tax bill is complex, but fortunately there are also some potential “low hanging nuggets” of tax savings. I recommend that you seek knowledgeable, industry-specific tax advice early this year in order to take advantage of them while you can.

Although the lengthy bill is riddled with complexity, it also comes with many positive opportunities for those in the agriculture industry. Let’s take a brief look at five of the major changes:

 

  1. Section 199(A) Deduction

This may well be the most complex provision in the bill, but potentially the most rewarding for the agricultural industry. This deduction replaces the domestic production activities deduction (DPAD), which was a 9 percent deduction for qualified production activities income. The primary purpose of this provision is to provide some equalization of tax rates for all business income, regardless of form of business entity. It does not apply to C corporations. It provides individuals a deduction of up to 20 percent of qualified business income (QBI). QBI is loosely defined as “qualified items of income, gain, deduction and loss” and generally includes all U.S. business income other than investment income and capital gains. For example, a farmer who owns a 50 percent interest in an LLC receives an allocable share of net income in the amount of $300,000. Under the new law, the farmer would only pay tax on $240,000 of income. There are potential limitations to this deduction depending on overall income, wages, unadjusted basis of capital assets, etc. 

  1. Capital Assets and Depreciation

The Section 179 deduction is still available, allowing you to write off assets, but the limit has increased from $500,000 to $1 million. Once acquisitions exceed $2.5 million, the deduction is limited. Bonus depreciation, which is the ability to expense “new” assets in a class life, has been increased from 50 to 100 percent (at the taxpayer’s option) beginning Sept. 27, 2017 and extending through 2022. One positive change is that equipment no longer needs to be “brand new,” but only “new to the taxpayer” to qualify. Also, most farm machinery depreciable lives have been reduced from a recovery period of seven to five years, with a change from 150 percent declining balance to a 200 percent declining balance. One pitfall to watch out for is that the ability to trade in equipment under the like kind exchange rules has been repealed (not for real estate, however). 

  1. Tax Rate Changes

Another win for the taxpayer is the reduction of tax rates. Prior to the change, corporate rates graduated from the lowest 15 percent bracket up to 35 percent; now those brackets have been replaced with a flat 21 percent rate, and alternative minimum tax has been repealed (C corporations only). Capital gain rates remain unchanged at 0, 15 and 20 percent. Estate tax rates also remain unchanged at 40. Individual income tax rates have been reduced overall, as shown in the following table applicable to married taxpayers filing jointly.

  1. Estate and Gift

The basic estate and gift tax exclusion from income has increased from $5.6 million in 2017 to $11.2 million beginning in 2018. This means that a married couple could pass away with an estate worth anything less than $22.4 million and pay no estate tax. That same couple could gift that amount away as well with no tax consequence. This is scheduled to revert to $5.6 million (indexed for inflation) in 2026. The annual gift exclusion (or the ability to gift an annual amount without reducing an individual’s lifetime exclusion) has increased from $14,000 to $15,000. 

  1. Net Operating Losses

Net operating losses (NOLs) are now limited to 80 percent of taxable income. The ability for individuals and entities alike to carry back these losses two years and forward 20 has been repealed (non-farmers only). NOLs will now only carry forward, indefinitely, for most entities. Farmers will have the ability to carry back losses two years, reduced from a five-year carryback.