Ten Things Farmers and Ranchers Should Know About New Tax Law
For the first time in over 30 years, Congress along with President Trump reformed our nation’s tax code. Farm Bureau was very involved in the development of the changes which offer a number of important changes for farm and ranch families. Below is a list of the top ten things farmers and ranchers need to know about the new tax bill.
*We have made every effort to ensure the accuracy of the information provided. As with anything, please consult a tax professional in order to fully examine how these new changes affect your individual operations.
- Lower Rates for Pass-Through Businesses, Individuals and Corporations
The new law continues seven brackets for individuals and all pass-through business income (sole proprietorships, partnerships and S-corporations) but expands them and lowers tax rates which are indexed for inflation. The law also doubles the standard deduction.
Rates and Brackets for married Filing Jointly
12% $19,050 22% $77,400
24% $165,000 32% $315,000
35% $400,000 37% $600,000
Unfortunately, the new pass-through rates and brackets do expire on December 31, 2025.
Pass-throughs will be able to deduct 20 percent of their business income. Business income includes payments from cooperatives, commodity wages and farmland rental income. The following limitations will apply:
- The deduction is limited for partnerships and S corporations to 50 percent of W-2 wages paid to employees OR the sum of 25 percent of W-2 wages paid plus 2.5 percent of depreciable business property.
- The W-2 limitation does not apply to taxpayers when taxable income does not exceed $315,000/$157,000 joint/individual and would be completely phased out when income reaches $415,000/$207,000 joint/individual.
- The deduction is not available to some service businesses, for example veterinarians, with taxable income over $150,000. The deduction for service businesses starts to phase out at $50,000 of income.
C-Corporation Businesses: The law sets the corporate tax rate at a flat 21 percent instead the current 15 percent, 25 percent and 34 percent and 35 percent brackets.
Implications for 2017: Depending on your individual circumstances, farmers and ranchers may want to consider deferring income to next year as the lower rates take effect for the 2018 tax year.
- The Ability to Make Capital Investments Has Improved
The new law permanently increases the amount of expenditures than can be deducted using Sect. 179 small business expensing from $500,000 to $1 million and increases the expenditure level at which the deduction begins to phase out from $2 million to $2.5 million indexed for inflation.
Immediate Expensing (bonus depreciation): Farmers and ranchers generally use bonus depreciation when expenditures exceed the Sect. 179 small business deduction limits. All farm structures qualify for the bonus depreciation deduction.
The bill allows businesses to fully and immediately write off business investments through 2022 and expands the deduction to include used as well as new purchases. After 2022, the percentage deduction reduces by 20% each year until bonus depreciation is eliminated beginning in 2027.
Depreciation of Farm Machinery: The bills shorten the depreciation period for farm equipment and machinery from 7 to 5 years.
Implications for 2017: Farmers and ranchers might consider making some year-end purchases of new or used equipment. The new law’s effective date for the expanded bonus depreciation rules start for property purchased on or after September 28, 2017.
- Farmers and Ranchers Can Still Fully Deduct Their Property Taxes
If you normally expense your property taxes on agricultural land and other business property on a Schedule C, E or F, you will continue to be able to fully deduct them. The new law does limit an individual’s ability to deduct their local property taxes and state income taxes at a combined $10,000, for those who itemize deductions.
- While Not Eliminated, the Estate Tax Exemption is Doubled
The new law doubles the estate tax exemption from $5.49 million to $11 million and indexes the exemption for inflation. Unfortunately, the increased exemption expires on December 31st, 2025. The bill does not change current stepped-up basis rules.
- Cash Accounting Expanded
The law expands the number of farm corporations and farm partnerships with a corporate partner that will be able to utilize cash accounting.
- 1031 Exchanges are Continued for Real Property
The new law continues like-kind exchanges for buildings and land, however it would end for equipment and livestock.
- Most Farms and Ranches Can Continue to Deduct Business Interest
The new law continues the interest deduction for businesses with less than $25 million of gross receipts indexed for inflation. Carryover rules are available to apply the excess interest expense to future years.
- Obamacare Mandate is Repealed & Health Care Deduction is Maintained
The bill’s repeals of the individual mandate by removing the penalty for individuals who do not purchase health insurance. The new law also maintain the deduction for medical expenses for those who itemize deductions.
- New Limits on Net Operating Losses (NOL)
The new law allows NOL to be carried forward indefinitely instead of current law 20 years but limits NOL to 80 percent of income. NOL can be carried back for two years instead of the five years as currently allowed for farms and ranches.
Implications for 2017: This is another one that should be discussed with your accountant. Given the changes made to limit the carry back from five to two years, an examination of your personal income and tax situation by a professional is in order.
- Section 199 is Eliminated, but a Fix was Included
The new law allows farmers to receive a 20% deduction on all payments from a farmer cooperative. The deduction cannot exceed the taxpayer’s taxable income for the year. The cooperative will then receive a 20% deduction on gross income less payments to patrons, limited to the greater of 50% of wages, or 25% of wages plus 2.5% of the cooperative’s investment in property.