Tax planning should be on the minds of all farmers. Due to the new tax laws that took effect in 2018, tax planning for 2018 – and this coming year – is more important than ever. Farmers should be ready to spend some extra time with their tax advisors to take full advantage of the new rules.
Here are some of the main issues that will need to be considered.
Section 199A
Section 199A is a new deduction for all pass-through businesses in 2018, such as partnerships, S-Corporations or LLCs. However, there are many subtle nuisances in the 199A deduction that need to be considered to make sure taxpayers are getting the full benefit of the deduction.
Farmers with incomes over $157,500 (single) or $315,000 (joint) face certain limits on the deduction. The final deduction may be limited by the rules to 50% of W-2 wages or 25% of W-2 wages plus 2.5% of qualified property. While this could be bad news for some entities with no wages, the new law also allows taxpayers to aggregate entities under common control and that have a commonality to the aggregation, such as the land being rented to the farm or the trucks being used on the farm. This could allow entities who might not be allowed a deduction on their own to get a benefit. However, the taxpayer has to make a formal election on their tax return in order to take this aggregation, so care should be taken to make sure the return is properly filed.
The most recent guidance from the IRS does not qualify cash rent as business income, and the 20% Section 199A deduction is only for qualified business income. To qualify, the income must be tied together with a farm operation. This means the entity must be a common group, which means at least 50% of the ownership in each is held by the same people.
Bonus depreciation
For purchases made during 2018 through December 31, 2022, 100% bonus depreciation applies to certain farm property, including used property. However, taxpayers should remember that bonus depreciation is a tax deferral, not an extra deduction. Therefore, if they later sell the assets, they would have to pay income tax on the proceeds. Depending on their income and the type of assets, farmers may want to consider opting out of bonus depreciation in certain situations.
Net operating losses
The new tax law allows farmers to carry back their net operating losses only two years or elect to carry it forward. The maximum loss a farmer can recognize is $250,000 (single) or $500,000 (joint), so the new rules make planning important for clients who are facing a loss this year.
Change in tax rates and brackets
Overall, tax rates will be lower for most taxpayers in 2018 as the rates and brackets have changed. Therefore, it will be important for farmers to do as much planning as possible to try and determine where their net income will end up for the year to take advantage of these new rates.
Itemized deductions
The new tax laws eliminated the deduction for personal exemptions but also increased the standard deduction to $24,000 (joint filers) and $12,000 (single). Therefore, many taxpayers will no longer need to itemize deductions because of the larger standard deduction amount. This law change may also affect how taxpayers structure their charitable giving, so this is another area they should discuss with their tax preparers.
Estimated tax payment
Although many farmers are conditioned to file by March 1 to avoid paying any estimated taxes before that date, they may want to consider making an estimated tax payment by January 15. This will enable them not to have to file their returns until April 15. This will give their tax preparers sufficient time to gather all the information necessary to file a complete and accurate return, especially for higher income taxpayers.
Medical deductions
If a taxpayer had large medical expenses in 2018 or is paying for long-term care, they should consider taking the deduction on the 2018 tax return. The medical deduction changes in 2019, so they would receive a bigger deduction for those medical expenses paid in 2018 versus 2019.
Contact your Yeo & Yeo tax professional for assistance in planning the best strategy for your situation.
