The passing of the Tax Cuts and Jobs Act is one of the most significant changes to tax reform in decades. Here’s a highlight of some of the major items in the bill that may impact you, your farming operation and/or agri-business.
Tax Cuts and Jobs Act Highlights for Farming and Agri-business
- The highest tax rate was at 39.6% at about $470,000 taxable income and will now be 37% beginning at $600,000 for married filing joint returns.
- The marriage penalty has returned. -Two people each hitting the single table pay less than a couple hitting the married filed joint table.
- There is no change to the capital gains rates. Taxpayers in the 15% bracket still get the 0% rate, then 15% until 20% at the highest income levels like previously.
- Grain gifts to kids with taxable income over $12,500 will be taxed at the highest rate of 37%. We expect most commodity gifts will slow or stop due to this change.
- The standard deduction is doubling but personal exemptions are going away. There will be no additional standard deduction for taxpayers over 65 or blind as in the past. Currently, approximately half of the population does not file a return because their AGI is less than $20,800 for a joint return or $10,400 for a single return. Those numbers would be $24,400 and $12,200 with the new bill resulting in even less filers. Raising the standard deduction is good for singles and couples but not necessarily good when there are children who previously had a personal exemption. However, the child tax credit is increasing from $1,000 to $2,000.
- The maximum business rate is set at 21%. This rate will be higher for some and significantly less for others.
- Itemized deductions:
- Home mortgage interest is limited to the interest on a $750,000 loan for new debt. Old debt is maintained as previously. A second home is allowed, however, home equity loan interest is not deductible.
- State, sales, and personal property tax will be limited to an aggregated $10,000.
- Charitable contribution deductions had no material changes.
- Miscellaneous itemized deductions suspended including tax preparation fees not tied to a business activity.
- Employer provided housing & meals in a Farming C Corp remain deducible and not taxable income to the employee, however, meals will be 50% deductible instead of 100%.
- The Estate Gift and GST Tax exemption doubled from $5.6 to $11.2 million AND the step-up in basis was maintained.
- 179 Election increased to $1,000,000 and increases what’s allowable to use for the deduction including roofs and HVACs. The phase-out is higher.
- Bonus depreciation – 100% deduction for all farm purchases 9-27-17 through 1-1-2023, new or used qualifies, including buildings.
- New farm equipment – five-year depreciable life instead of a seven year life using a faster method. Used equipment will remain at seven.
- Like Kind Exchanges/trading – becoming a sale and a purchase instead of a trade with deferred gain on the item being traded. Only real estate still qualifies for the deferred gain treatment. No deferral on any item that was depreciated including tile.
- Net Operating Loss for farmers – carrybacks went from a possible five or two-year carryback to only a two-year Carryforwards still apply.
- The 199 Deduction went away (DPAD) and was replaced, somewhat, by 199A which includes a 20% deduction for selling grain to a Coop. This is being highly scrutinized. There is no clear answer to how this will shake out. In the meantime, farmers are selling to coops anticipating the deduction.
In a small nutshell, these are the new provisions we want to bring to your attention. Here at TD&T we are preparing for implementation of the new tax bill in 2018 and are happy to answer your questions on how it will affect you, your farming operation and/or agribusiness.
Susan Voss, CPA, one of the heads of our Ag team, provides the next installment in her series on helping farm families understand and respond to changes in farming and agribusiness.