Tax Reform Implications for Agriculture

 By Michael Cox

Too much fanfare, the House and Senate approved ‘Tax Cut and Jobs Act’ was signed into effect by President Trump on December 22nd 2017.  The new tax reform was aimed at reducing overall taxation and simplifying the tax code. Republicans claim the tax bill will stimulate investment and expansion by business, repatriation of off-shore profits back to America and further bolster strong economic growth.  American Dairymen Magazine recently discussed the major possible implications of the reform for agriculture with accountants from two of the nation’s leading accounting and tax advisory firms; Genske Mulder and Company, California and CliftonLarsonAllen LLP, Illinois.
“At the moment, the bill is a set of guidelines to allow lawmakers to work on the finer details,” says Gary Genske, of Genske Mulder and Company, “but we do have a clearer picture now of what the big changes will be.” The most unprecedented change is the new 20 percent deduction on business income. “For a married couple with income less than $300,000, 20 percent can be deducted ‘straight off the top’, says Genske. For higher income businesses, the deduction is limited to 50 percent of W-2 wages paid, or the combined sum of 25 percent of W-2 wages plus 2.5 percent of business depreciable property. It is yet unknown if the 20 percent deduction will apply to both income and social security, which would affect self-employed farmers.
A potential ‘glitch’ in the new bill is the advantage it infers to sales made to cooperatives. “Under current interpretation, if a farmer sells to a co-op he gets the 20 percent deduction off total income, but if he sells to a private company, the deduction only applies to profit,” says Patrick Sturz of CliftonLarsonAllen LLP. This section of the bill has raised controversy in recent weeks and is likely to be reviewed and possibly amended before the end of the year.
C- Corporations have also seen changes. For farmers utilizing a C-Corp, the old tax rates of 15 percent, 25 percent, 34 percent and 35 percent have now been merged into a single 21 percent rate. “Overall this is positive, says Sturz, “but lower income farmers of $100,000 or less need to be careful as their tax liability may actually rise by 6%”.  A minor C-Corp deduction change was made to the ‘household meals’ deduction, which has been halved to 50 percent and will be phased out over time. Although all tax brackets have dropped, in some high-tax states such as California or New York, the reduction will not compensate for the repeal of some deductions that were applicable in the past.
Capital Investment Sect. 179 has also been re-written. Genske says, “The deduction has doubled from $500,000 to $1 Million, with phase-outs coming in at $2.5 Million.” ‘Bonus Depreciation’ has been altered from the old system of 50 percent write-off before depreciation, to a new 100 percent write-off on new or used equipment. Bonus depreciation can also be calculated into a negative figure, whereas the Sect 179 will stop once the calculation hits zero. “The lifespan of depreciable assets has shortened too, from seven years down to five years,” says Sturz. Like several sections of the bill, the bonus depreciation has a timeline of five years, after which the allowable depreciation will drop by 20 percent annually.
Net Operating Losses, which could be a factor for many ag producers in 2018, is now limited to $500,000 for pass-through entities, with 80 percent carryforward allowed. Carryforward and carryback rules have changed to a maximum of two years carryback and unlimited carry forward.
The ‘Death Tax’ or Estate Tax threshold has doubled to $24 Million for married couples. This will effectively eliminate Federal Estate Tax for the majority of family farms, although local State taxes are still likely to apply.
For beef producers, particularly feedlots, the significant change is the limit to 30 percent deduction on loan interest for business generating $25 Million or more. “They need to be paying attention to that and working on strategies around it,” says Sturz. For example, giving up the 100% bonus depreciation could allow for further loan-interest deductions.
Cash accounting will remain in play for farmers, with the gross income limit raised from $5 Million to $25 Million.
Like-Kind Exchanges are still permissible but limited to real property, i.e. land can be swapped for land tax-free, but trade-ins on equipment will not be tax-free.
The AMT – Alternative Minimum Tax will remain for individual filers, however the exemption levels have been increased.
People in agriculture should be proactive and seek professional advice regarding the tax bill changes. “Some of the benefits are influenced by your State, so you really need to get good advice,” says Genske. Although the market outlook for commodities is somewhat gloomy, especially for dairy, Sturz urges farmers to “think big-picture and make sure any necessary steps are taken in 2018” to set the business up to succeed further once the market pendulum inevitably rises.