2018 Tax Income Adjustments - Consider Grain for Charitable Deductions; Watch Out for Equipment Trad
OMAHA (DTN) -- It's going to take months before the IRS starts sorting out the tax law with issues such as where to take income deductions for pass-through entities, but there are still some things for farmers to consider when planning taxes for the year ahead.
One thing to recognize is that businesses still get to fully deduct property taxes directly related to income, such as property taxes for equipment and land for farming and ranching purposes.
Tina Barrett, director of Nebraska Farm Business Inc., said her office was inundated with phone calls at the end of the year from farmers wanting to know if they should pre-pay property taxes. There was a disconnect between the $10,000 cap on state and local taxes that individuals will face going forward and property taxes deducted for business. The tax law did not limit the ability to deduct property taxes for businesses, such as land used for farming, Barrett noted. Most news articles didn't differentiate between real-estate taxes for homes versus business property.
"We were probably getting eight to 10 calls a day from people asking if they should pre-pay their property taxes," Barrett said. "Everyone was saying you should do it. We were hearing even the county assessors were recommending people pre-pay their property taxes. For 90% of the people in the country that they were talking about with itemized deductions, that probably matters, but in the farm world, it's considerably different when it comes to their farm taxes being deductible."
Looking at charitable contributions, farmers could see some benefits by reconsidering how they donate at church or to other major community groups. Fewer people are going to itemize because of the $24,000 standard deduction for a married couple filing jointly. With the changes in Schedule A deductions, farmers may want to consider donating grain more often for their charitable contributions rather than cash or checks.
"We might want to think about using grain for charitable contributions now more than ever rather than giving cash for charitable contributions," Barrett said.
A grain donation is not actually reported on a Schedule A. By donating grain instead of giving cash or a check, the actual value from that donated grain is not added to income on the Schedule F. Instead, the donation is recognized by lowering a farmer's taxable income, as well as lowering income subject to self-employment taxes.
"There are a few little rules to follow," Barrett said. "You should deliver the grain to the elevator in the charity's name, and somebody from the charity should be the one to decide when to sell it. That's the only tricky thing."
In dealing with local churches, Barrett notes the farmers making the donations are generally also involved in the churches to help decide when the grain should be sold. For other charities, like a local school athletic department or community group, the farmer just needs to communicate with the charity staff about selling the grain.
"Now that itemizing is going to be reduced, that could be a bigger savings for farmers," she said.
One issue farmers will want to watch is equipment and machinery trade-ins. Like-kind exchanges were kept in the tax law for real-estate property, but such exchanges were ended for personal property. Until now, trading in a tractor was a tax-free exchange. Going forward, from a record-keeping standpoint, tax preparers and accountants will need to know how much the old tractor was sold for and how much the new tractor is valued. That's because the gain will have to be recognized on the old tractor, even if the new tractor can be fully deductible under changes in the law on deductibility of new machinery.
The big issue here might not be so much an adjustment on the federal level, but the changes in Section 179 and full deductibility of equipment expensing could create more headaches with state income taxes.
Iowa, for instance, in the past has not coupled business deductibility with the federal tax laws, so the deductions can be limited. Nebraska has a different problem because personal property taxes will increase with taxes on the full value of the new equipment, rather than paying personal property taxes just on the difference in trade value.
"So there are some state implications to equipment deductibility that are probably bigger than the federal," Barrett said. "There are definitely some strange things that are going to fall out from the state level."
A few farmers have also contacted DTN/The Progressive Farmer on some issues. Just to clarify, the new tax law does not require paying self-employment taxes on rental income. That did not happen. Such language was initially in the House bill but was removed before the final bill was approved.
There has already been talk about farmers moving to C Corps in some cases to have the 21% tax rate. But Barrett doesn't think there will be a lot of shifting at this point because of the 20% deduction on S Corps, partnerships, Schedule C and Schedule F filers.
"It's going to be interesting to see how that shakes out and what the IRS rules are going to be, but I don't think there's going to be a lot of reasons to change business structures to get to that 21%," she said.
The big difference, however, is the 21% corporate rate is permanent in the law while the 20% deduction, like a lot of other changes in the tax law, is set now to expire at the end of 2025.
For larger operators, Paul Neiffer, a principal with CliftonLarsonAllen, warns there are scenarios with the way the 20% deduction is used on the tax form that could potentially exclude farmers from USDA farm-program payments down the line. That's because the 20% deduction comes after the adjusted gross income calculation used by USDA's Farm Service Agency for farm program eligibility, Neiffer notes in his Agribusiness blog. To lose farm-program payments, however, requires a three-year average of AGI over $900,000. Ideally, a farmer and his or her accountant are going to figure out how to resolve that problem if it crops up on the tax return in 2019.