Tax Time – What Farm Owners Need to Know

Our newest tax bill started out in the House as “House Resolution 1 (H. R. 1) Tax Cuts and Jobs Act”. The Senate however, didn’t feel that was descriptive enough, so it was renamed “An Act to provide for reconciliation pursuant to Titles II and V of the current resolution on the budget for Fiscal Year 2018.” Is it any wonder why it takes a long time to get things done in the legislature???

Regardless of the name, the bill was passed on December 22, 2017, and then signed into law. Two of the main changes that affected every taxpayer were the lowering of personal tax rates and the raising of the standard deduction. The new tax rates for Individuals and for Married Filing Jointly are shown below:

The Standard Deduction for individuals was raised from $6,350 to $12,000 and for couples from $12,700 to $24,000, or almost double. While this was a great benefit, as with many benefits from new legislation, we gave something up to get something new. What was given up was the personal exemption of $4,050 per person in 2017, leaving the net effect from the increased Standard Deduction at roughly $1,500 for individuals, and $3,000 for couples. In addition, several itemized personal deductions were either lost or limited. These include the following:

1. Limits the combined deduction for real estate, sales and state income taxes to $10,000

2. Eliminates

       a. Unreimbursed Employee expenses

       b. Tax Preparation

       c. Safety deposit box rental

       d. Hobby expenses

       e. Investment fees and expenses

       f. Legal expenses

       g. Moving expenses (except for Armed Forces)

       h. Donations in exchange for collegiate sporting event seating.

       i. Deductibility of interest on home equity loans

The bill did leave in place the ability to make charitable donations directly from your IRA without including it in your income, for those 70-1/2 or older.

With the above changes, tax preparation for many will become much simpler, as a high percentage of taxpayers will no longer benefit from itemizing deductions and will choose to utilize the new, higher Standard Deduction.

Married Filing Jointly Income Tax Rate 
Current Law:                        H.R. 1: 

$12,700 joint standard ded.                   $24,000 joint standard ded. 
10% above standard ded.                       10% above standard ded. 
15% starting at $18,650                          12% starting at $19,050 
25% starting at $75,900                          22% starting at $77,400 
28% starting at $153,100                        24% starting at $165,000 
33% starting at $233,350                        32% starting at $315,000 
35% starting at $416,700                        35% starting at $400,000 
39.6% starting at $470,000                     37% starting at $600,000 
                                                                   Rates and brackets sunset 12/31/25 

Individual Income Tax Rate 
Current Law:                        H.R. 1: 

$6,350 single standard ded.                   $12,000 single standard ded. 
10% above standard ded.                       10% above standard ded. 
15% starting at $9,525                            12% starting at $9,525
25% starting at $38,700                          22% starting at $38,700 
28% starting at $93,700                          24% starting at $82,500 
33% starting at $195,450                        32% starting at $157,500 
35% starting at $424,950                        35% starting at $200,000 
39.6% starting at $426,700                     37% starting at $500,000


Changes that have a more direct effect on farm businesses include:

1. Changing the corporate income tax rate to a flat 21% from variable rates ranging from 15% - 35%. This will be an advantage for C-Corps with incomes in excess of $90,000. For those under this amount, the new rate will actually be a tax increase.

2. Rates for Irrevocable Trusts and Estates were raised significantly, hitting 35% at $9,150, and 37% at $12,500 of income.

3. Section 1031 like-kind exchanges were ended for livestock and equipment but remain in effect for Real Property.

4. Bonus Depreciation was raised from 50% to 100% and extended to used as well as new property and equipment. This deduction will be available under any lease type. The deduction will ratchet down 20% per year after 2022.

5. Section 179 Deduction was increased from $510,000 to $1,000,000. Still restricted to materially participating leases.

6. A deduction of 20% of business income before capital gains is available to individuals with incomes under $157,000 or married couples below $315,000 of income that own a business (including a farm business) either as a sole proprietor, or through a pass-through entity such as a partnership, S-Corp, or LLC. The deduction does not appear to apply to cash rent leases, but a definitive determination has not been made yet. For those over the above income thresholds, the deduction phases out, or has to be met through a percentage of wages paid.

7. A 20% deduction for coop members, on grain sold, was also part of the bill, but due to an outcry by non-coop grain buyers, feeling that coops were handed an unfair advantage, this portion of the bill was changed and has made the deduction detailed in #6 above more complicated to calculate.

8. Net operating losses can only be carried back 2 years instead of 5 and is limited to 80% of taxable income. However, losses can now be carried forward indefinitely.

On the estate planning side, the combined lifetime gift and estate tax exemption has been increased from $5,600,000 for 2018 to $11,200,000 per individual. Portability, or the ability for the second spouse to utilize any portion of the exemption not utilized by the first spouse to die was retained, along with stepped-up basis for assets that pass through an estate. This increased exemption does not change the importance of succession planning but does add additional flexibility to the process.

As with any new law, there are pros and cons, but overall, the tax bill should be positive for farm business owners.

Posted By Hertz Farm Management on August 21, 2018

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