What the new tax law means for agriculture
Farm Credit East tax experts explain 17 ag implications of the new tax reform law.
Farm Credit East tax experts have reviewed the 2017 Tax Cuts and Jobs Act — the largest overhaul of the U.S. tax code in 30 years. “Overall, the new tax provisions will provide significant benefits to Northeast farmers,” says Dario Arezzo, Farm Credit East senior tax consultant. “However, certain provisions will unfortunately limit the value for some producers.” Here’s a quick look:
• Tax bracket changes. While the total number of brackets remains at seven, the top rate will fall from 39.6% to 37%. And, the amount of income covered by the lower brackets has been adjusted upward.
• Standard deductions. The standard deduction for individuals increases to $12,000 for single filers and $24,000 for joint filers.
• Alternative minimum tax. The AMT still remains for individuals, but exemption amounts are significantly increased and will be indexed for inflation.
• State and local tax deductions. SALT deductions for state and local property plus income or sales taxes are limited to $10,000 annually.
• Section 179. Beginning with the 2018 tax year, farmers will be allowed to immediately write off capital purchases such as breeding livestock, farm equipment and single-purpose structures (such as milking parlors) up to $1 million. The phase out on this expensing provision doesn’t kick in until a farm reaches $2.5 million in purchases.
• Bonus depreciation. Farmers will be able to write off 100% of qualified property purchased after Sept. 27, 2017 through 2022 (at which point a phase-down occurs). The new law expands bonus depreciation to include new and used property purchased or constructed, and to plants bearing fruits and nuts.
Keep in mind that many states don’t conform exactly to the federal bonus and 179 depreciation provisions. In most cases, depreciation taken at the state level is different. For example, a farmer expensing 100% of a $3 million capital purchase with bonus depreciation may not receive that $3 million deduction at the state level. Rather, the state deduction will incorporate depreciation on those assets over their normal recovery lives and methods.
• Farm equipment. Machinery and equipment (other than any grain bin, fence or other land improvement structure) will be able to be depreciated over five years, as long as the original use of the asset begins with the taxpayer.
• Like-kind exchanges. They’re limited to real property. For example, farmers can still swap land for other land tax free, but equipment trade-ins will no longer be a tax-free event.
• $25-million interest deduction limitation. Businesses, including farmers, will be limited on deducting interest expense 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% of adjusted taxable income. There is an election farmers may consider to avoid that limitation. The only catch is that a slower depreciation method will have to be used on farm property with a recovery period of 10 years or more (i.e. greenhouses, milking parlors, barns, etc.).
• Carry interest forward. Farmers will be permitted to carry interest forward indefinitely, subject to pass-through limitations for partnerships.
• Corporate tax rate. There’s now a flat 21% corporate tax rate. While many farmers no longer operate in the corporate structure, the remaining ones structured as C-corps would typically fall within the 15% tax bracket. Those farmers may want to consider converting to an S-corporation to avoid that 6% tax increase.
• Cash accounting remains. Farmers with average gross receipts (for more than three years) of under $25 million can still use the cash method. They won’t be required to account for inventories. However, cash basis taxpayers won’t be able to deduct inventory until sold under section 471. The uniform capitalization rules are also removed for taxpayers under the $25 million threshold.
• Net operating losses. NOLs are limited to 80% of taxable income. Farmers are permitted a two-year NOL carryback.
• Section 199 repealed, replaced. The Domestic Production Activities Deduction has been repealed. As a result, many cooperatives accelerated that pass-through deduction to patrons before the end of 2017.
Ag and horticultural cooperatives will have a new 20% deduction. It’ll be beneficial for reducing cooperative income. However, unlike the DPAD, this is taken at the cooperative levels and isn’t directly passed on to patrons.
• Estate tax. The federal estate tax exemption rates double to $11.2 million per individual ($22.4 million for married couples) in 2018.
• Non-corporate taxpayers. Like cooperatives, non-corporate taxpayers will also get a 20% deduction to offset ordinary income. Much like the DPAD that’s being repealed, there are limitations associated with this 20% deduction — amount of wages and unadjusted tax basis.
The deduction only offsets income tax, not self-employment tax. One concern is that it may be of little use to dairy farmers who cull cows since any capital gain sales (i.e. raised cows) limit its impact.
• Breweries, distilleries and wineries. Alcohol manufacturers will enjoy a two-year excise tax reduction. The credit against the wine excise tax was also expanded, and sparkling wine producers are included.