AUBURN UNIVERSITY, Ala. – Many farmers and ranchers will benefit from tax law changes brought about by last year’s Tax Cuts and Jobs Act (TCJA). Producers should be aware of changes and how they will affect the operation’s bottom line.
Kevin Burkett, a Farm and Agribusiness Management Team regional agent, suggests contacting a tax professional to discuss changes and their potential effects related to specific operations.
Net Operating Losses
Net operating losses can now carry forward indefinitely. Under prior law, net operating losses could only carry forward 20 years. These deductions are also limited to 80 percent of taxable income. Under the new TCJA, farm and ranch businesses can carry the losses back two years. This is a change from prior laws, which allowed a preceeding five-year carry back.
Qualified Business Income Deduction
The most significant change for farmers is the addition of the new qualified business income deduction. The deduction is applicable to sole proprietors and partners, in addition to members of limited liability companies. It also applies to shareholders of S corporations.
“For tax years after Dec. 31, 2017, taxpayers other than corporations may be entitled to a deduction of up to 20 percent of their qualified business income from a qualified trade or business,” Burkett said. “This includes income from a passthrough entity, but not from a C corporation—plus 20 percent of qualified real estate investment trust dividends and qualified publicly traded partnership income.”
The deduction is subject to multiple limitations. These include:
- Trade or business type.
- Taxpayer’s taxable income.
- Amount of W-2 wages paid with respect to the trade or business.
- Unadjusted basis immediately after acquisition of qualified property held by the trade or business.
The qualified business income deduction can be taken in addition to standard or itemized deductions. In some cases, however, patrons of horticultural or agricultural cooperatives may have to reduce their deduction. The IRS will also be issuing separate guidance for co-ops.
Accounting Method Changes
Under the TCJA, more farm corporations and partnerships can use the cash basis of accounting for tax purposes.
“This includes small business taxpayers, such as farmers and ranchers with average annual gross receipts of $25 million or less in the prior three-year period,” Burkett said.
“Depreciation is one area that farmers are always interested in, and there are a number of items that changed with the TCJA,” Burkett said.
- New equipment and machinery is five-year property.
- Used equipment remains seven-year property.
- Property placed in service after Dec. 31, 2017, is not subject to the 150 percent declining balance method.
- New and certain used equipment purchased during the tax year qualifies for 100 percent first-year bonus depreciation.
- Businesses that elect out of the interest deduction limit must use the alternative depreciation system to depreciate any property with a recovery period of 10 years or more.
Interested farmers can also sign up for “Tax Tips.” These include updates and details on tax laws from the IRS. For more information or direction, contact your local Farm and Agribusiness Management Team member.
Featured image by shutterstock.com/cbies.