IRS Releases Section 199A Guidance - Farmer Can Aggregate Income from Multiple Entities to Maximize
MOUNT JULIET, Tenn. (DTN) -- The Internal Revenue Service outlined the rules on how farmers and others with pass-through business entities can claim the new Section 199A tax deduction, and tax experts said it includes several provisions favorable for farmers.
The new deduction allows businesses structured as sole proprietorships, partnerships, trusts and S corporations, to deduct 20% of their qualified business income. It does not apply to C corporations, which are tied to the 21% tax rate detailed in the new tax law.
The regulations released Wednesday encompass 184 pages, though most of the text explains why the IRS made the interpretations of how certain income will be treated. The rules also provide a 45-day comment period that would give the IRS time to make changes depending on the response.
"I thought, overall, it was fairly favorable to taxpayers on the farm side," said Paul Neiffer, a farm accounting expert with the firm CliftonLarsonAllen.
Neiffer and American Farm Bureau economist Veronica Nigh agree that one of the most favorable provisions guides how multiple farm entities are treated. As Neiffer noted, most commercial farm operations these days may have multiple LLCs owning different pieces of land, an S Corporation that owns the machinery and/or another business entity that runs farming operations. The regulations allow farmers to group all of those entities together if they meet certain criteria and treat it as one entity.
"I think it's a pretty clear win that farmers will be able to aggregate these entities under one business as long as they can show common ownership," Nigh said. Usually, farmers will need to show 50% common ownership, which Nigh doesn't see as a big hurdle. The regulation also allows farmers to aggregate wages, a decision that could save farmers a lot of paperwork.
"This allows them to aggregate all of that stuff together, combine all the wages, combine all the property and just have one calculation to get the full deduction or coming close to getting the full deduction," Neiffer said.
There are still questions about how cash-rent landlords and crop-share landlords qualify for the Section 199A, Neiffer said, but it appears those landlords won't qualify for the deduction if the land is being rented by unrelated parties.
"What I'm reading between the lines is it doesn't qualify, but we're not sure," Neiffer said. "Maybe a crop-rental landlord that shares in the expenses, maybe that's enough to qualify, but otherwise, cash-rent landlords are going to be SOL (out of luck)."
Nigh agreed, saying it appears the owner's involvement would need to rise to a level that generates some amount of self-employment tax to earn the deduction. In areas with a high number of absentee landlords or landlords that are uninvolved in farming operations, it could have some impact on decisions of whether or not to sell land.
"It could allow folks who are going to buy it for their own use to offer more for a particular parcel because they know they're going to be able to deduct 20% of the income off of it," she said. "That could ... make some changes to purchasing power for different farmers."
The IRS rule also makes it clear capital gains, such as a Section 1231 gain when selling depreciable property, does not qualify as business income for businesses seeking to receive the pass-through entity deduction. It also sets income caps for those who qualify for the deduction.
For farmers or other businesses with taxable income above $315,000 for a couple using the "married filing jointly" status, or any other taxpayer with taxable income above $157,500, the deduction is capped at 50% of wages or 25% of wages in business plus 2.5% "of the unadjusted basis immediately after the acquisition of all qualified property."
Issues such as property limitations and W-2 wages do not apply for farmers with $315,000 or less in taxable income if they are married filing jointly, or $157,500 for all other taxpayers. The rules and exclusions apply to those businesses with taxable incomes above those thresholds. The deduction phases out, and does not apply to married-filing-jointly farmers with more than $415,000 in taxable income.
"If you are under the threshold, it does not matter," Neiffer said. "The majority of farmers out there, they make less than $315,000 in taxable income. Even very successful farmers a lot of times get their taxable income below $315,000. So they don't care about wages or qualifying property."
The IRS rules released Wednesday do not address how Section 199A will work for farmer cooperatives. The IRS stated that issue will be dealt with in a later regulatory release.
"That guidance is going to come out later on," Neiffer said. "I think in the Code it's pretty clear you will still do your 199A as normal, then you are going to have to look at your operations related to cooperative sales and reduce it by either lesser than 50% of the labor related to those sales or 9% of qualified business income related to those sales."