The largest overhaul of the U.S. tax code in three decades went into effect this year, impacting farmers, ranchers and other rural landowners in a variety of ways. For the most part, financial experts anticipate benefits for these groups.
“The 2018 tax law changes include several items that I feel will be beneficial to agricultural producers,” says Burl Lowery, a Brownwood, Texas, certified public accountant and director of Central Texas Farm Credit. “The increase in the exemption in estate and generation-skipping taxes to $11.2 million in 2018 will allow more farmland to be passed to future generations with less or no estate tax.”
The increase in the exemption in estate and generation-skipping taxes to $11.2 million in 2018 will allow more farmland to be passed to future generations with less or no estate tax.
Other positives for farmers, according to Lowery and fellow CPA John Adams of Decatur, Alabama, are the immediate expensing of new and used equipment purchases, the overall reduction in tax rates, a new flat rate for corporations and the 20 percent deduction for pass-through income.
But while the tax reform movement promised to simplify the tax reform, much complexity remains.
“For that reason, it is imperative that producers begin the planning process now with their tax advisors,” says Adams, who serves on the Alabama Farm Credit Board of Directors.
Following are some of the tax law provisions that will affect agricultural producers in 2018.
Individual Tax Brackets
The new federal tax law was expected to change some of the individual tax rate brackets and adjust the bracket amounts. While the total number of brackets remains at seven, the top rate will fall from 39.6 percent to 37 percent, and the amount of income covered by the lower brackets has been adjusted.
Section 179 Depreciation Deduction
Beginning with the 2018 tax year, farmers will be allowed to write off capital purchases, including breeding livestock, farm equipment and single-purpose structures, such as milking parlors, up to $1 million dollars. The phase-out of this expensing provision does not kick in until a farm reaches $2.5 million in purchases.
Farmers will now be able to write off 100 percent of qualified property purchased after September 27, 2017, through the year 2022, at which time a phase-down occurs. In the past, many farms used bonus depreciation on general-purpose barns to receive an additional deduction of 50 percent, since they are classified as “20-year property” and are ineligible for Section 179.
The new law expands bonus depreciation to include both new and used property that is purchased or constructed. Related party restrictions will limit this provision based on the technical definitions of “related parties” in the tax code. The 100 percent deduction also applies to fruit- and nut-bearing plants that are planted during the year.
It is important to note that many states do not conform exactly to the federal bonus and Section 179 depreciation provisions. For example, a farmer expensing 100 percent of a $3 million capital purchase with bonus depreciation may not receive that $3 million deduction at the state level.
Farm machinery and equipment (other than grain bins, fences or other land improvements) will be eligible for depreciation over five years, as long as the original use of the asset begins with the taxpayer.
Like-kind exchanges are limited to real property. For example, farmers can still swap land for other land tax-free, but equipment trade-ins will no longer be tax-free.
$25 Million Interest Deduction Limitation
Businesses, including farms, will now be limited on interest expense deductions 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 percent of adjusted taxable income.
There is an election farmers may consider in order to avoid the limitation. The only catch, however, is that a slower alternative depreciation system will have to be used on farm property with a recovery period of 10 years or more, such as greenhouses, barns, etc. Farmers will be permitted to carry interest forward indefinitely, subject to some pass-through limitations for partnerships.
Corporate Tax Rate
Although the new flat rate will benefit most farmers by decreasing their tax rate, some farming corporations that fall within a 15 percent tax bracket may actually see a tax rate increase. Those business owners may want to visit with their accountants about advantages to modifying their corporate structure.
Cash Method Accounting
Farmers with average gross receipts (more than three years) under $25 million will be permitted to use the cash method of accounting. Additionally, these taxpayers will not be required to account for inventories under Section 471. (However, cash-basis taxpayers will not be able to deduct inventory until sold.) The uniform capitalization rules are also removed for taxpayers under the $25 million threshold.
Net Operating Losses
The law limits Net Operating Losses (NOLs) to 80 percent of taxable income. Farmers are permitted a two-year NOL carryback.
Domestic Production Activities Deduction
The Section 199 Domestic Production Activities Deduction (DPAD) has been repealed. As a result, some cooperatives may accelerate that pass-through deduction to patrons before year end.
The federal estate tax exemption rate will double to approximately $11.2 million per individual, and $22.4 million for married couples in 2018. These increased amounts will sunset on January 1, 2026.
Like cooperatives, non-corporate taxpayers will also get a 20 percent deduction that may be used to offset ordinary income.
Of concern, much like the DPAD that is being repealed, there are limitations associated with the non-corporate taxpayers’ 20 percent deduction, such as the amount of wages and unadjusted tax basis the businesses have. The cooperative members’ deduction has limitations as well. These limitations are somewhat complicated, and certain provisions remain unclear as to their mechanics. Additionally, the deduction only offsets income tax, not self-employment tax.
Breweries, Distilleries and Wineries
Alcohol manufacturers will enjoy a reduction in excise tax for the next two years. The new legislation also excludes the aging periods for beer, wine and spirits from the production period with regard to the Uniform Capitalization (UNICAP) rules, thereby allowing deductions over a quicker timeframe. The credit against the wine excise tax was also expanded.
The Affordable Care Act
The Affordable Care Act was not repealed with the new tax provisions. While the individual health insurance mandate technically remains, the penalty has been reduced to $0, effectively rendering it moot.
Adapted from an article titled “What the New Tax Law Means for Northeast Agriculture,” published by Farm Credit East, December 2017. Contributors: Dario Arezzo, Joseph Baldwin, Paul VanDenburgh, Christopher Laughton, Kristine Tidgren and Tiffany Dowell Lashmet.
Disclaimer: The information in this report has been compiled from sources believed to be reliable. This is provided for general information purposes only and is not market advice. Farm Credit Bank of Texas makes no representation or warranty regarding the content presented.