What does the new tax law mean for farmers | Taxes | Michigan Farm News

What does the new tax law mean for farmers?

Category: People, Politics

by AFBF

Farmer at desk
The bill seems certain to lower federal taxes paid by most farmers and ranchers.

Benjamin Franklin is credited with the astute observation that “nothing is certain except for death and taxes.” On Dec. 20, Congress voted to pass a sweeping tax reform bill that won’t change Franklin’s sage guarantee, but does seem certain to lower federal taxes paid by most farmers and ranchers.

The Tax Cuts and Jobs Act (H.R. 1) will deliver modest tax reductions for W-2 earners in the form of modified individual tax brackets, which are included below.

The bill attempts to simplify tax preparation for taxpayers by eliminating deductions that impacted a fairly small number of filers and replacing them with a higher standard deduction.

In 2017, the standard deduction for a joint return was $12,700. In 2018, the figure will climb to $24,000. In addition, individual rates have been adjusted downward and the brackets expanded so that a larger amount of income is subject to lower rates. Figure 1 compares the 2017 and 2018 individual tables.

(Click on chart to enlarge)

tax figure 1 mfn 2017

Given that 93 percent of U.S. farms file their taxes through the individual code, these changes are important. However, the business provisions that impact farms, ranches and other pass-through businesses offer the greatest chance of improvement for agriculture.

The table at the end of the story compares the business provisions of current tax code and the Tax Cuts and Jobs Act.

Our calculations

A few weeks ago we presented estimates of the impact of the House, Senate and current tax plans based on a few select elements critical for a basic understanding of the differences between the plans.

We have updated our calculator to reflect the final bill, included below. Our examples are based on taxable income for a married couple filing jointly, calculated based on individual tax rates, standard deduction, two personal exemptions (current only, personal exemptions are eliminated in H.R. 1) and pass-through business tax rates. The final conference bill looks more like the Senate version, with a few modifications that fairly marginally impact the tax liability farmers and ranchers will face.

Pass-through business provisions

The conference bill provides that individuals operating pass-through businesses will be able to take a deduction for 20 percent of their business income through Dec. 31, 2025. This is a small reduction from the Senate bill, which would have allowed for a 23 percent deduction.

As in the Senate version, the deduction is unlimited below a joint household income, though the threshold of $315,000 in the final bill is significantly lower than the $500,000 threshold in the Senate version.

For farms and ranches with joint income beyond $315,000, the deduction is limited by one of two calculations, chosen by the business owner.

Those calculations are 1) 50 percent of W-2 wages paid to employees or 2) the sum of 25 percent of W-2 wages paid plus 2.5 percent of depreciable business property. Farms and ranches with high labor costs, like dairies and specialty crop growers, will likely maximize their deduction using the first calculation, while farms and ranches with an extensive collection of expensive equipment and single-use agricultural buildings will maximize the deduction with the second calculation.

We have not included any pass-through deduction for households with a combined taxable income above $315,000, since there is so much variability around which deduction limitation calculation would maximize the deduction available. Even without this deduction, the effective rate these farms and ranches will pay is reduced, but we should expect to see that effective rate fall considerably once the individualized deduction is included.

Figures 2 through 4 compare the tax treatment of a married couple with the same household incomes, across different combinations of farm and off-farm incomes. Figure 2 is the result for a farm household with $20,000 in off-farm income.

Figure 3 represents a farm household with $30,000 in off-farm income and figure 4 represents a farm with $60,000 in off-farm income. These thresholds are approximately equal to the earned off-farm income of commercial, intermediate and residence farms surveyed in the 2015 ARMS survey.

(click on charts to enlarge)

tax figure 2 mfn 2017

tax figure 3 mfn 2017

tax figure 4 mfn 2017

H.R.1 offers a significant reduction in tax liability and the effective rate that farmers pay, based on the elements of H.R. 1 that we evaluated.

Of course, there are a number of elements that we did not include, some of which may be very important in determining the amount each individual farm pays.

We encourage you to compare all of the differences and refigure your last tax bill to see what it would have been under the rules of the new tax bill.

H.R. 1

Current Law

Corporate Tax Rate

21% flat rate

Rates are 15%, 25% and 34% and 35 %

Deduction for Property Taxes

Business deduction continues for real estate and person property taxes on farm business assets.

Businesses can deduct real estate and personal property taxes on farm business assets.

Sect 199 Domestic Production Activities Deduction

Repeals. Sect. 199

Sect. 199 allows a deduction for proceeds from producing agricultural or horticultural products. The deduction is limited to the lesser of 9 percent of adjusted gross income or 50 percent of W-2 wages paid. Cooperatives can claim the deduction or pass it to their members.

Capital Gains Taxes

Continues approximately the same rates and thresholds as present law.

Capital gains taxes are due when farm or ranch land, buildings, breeding livestock and timber are sold. Taxpayers in the 10 and 15 percent income tax brackets pay no capital gains tax. Taxpayers in the 25, 28, 33, or 35% brackets pay 15%. Those in the 39.6 percent bracket pay 20%.

Sect. 1031 Like-Kind Exchanges

Continues like-kind exchange deduction for buildings and land (real property). Like-kind exchanges will end for equipment and livestock.

Capital gains taxes and, in some cases, ordinary income tax on the sale of business property can be deferred if a farmer purchases replacement property of a like-kind.

Self-employment taxes

Does not change laws that determine the SE-taxes that farmers pay.

Farmers who file their taxes as sole-proprietors or as a member of a partnership pay SE taxes on their net business income. Farmers who organize their businesses as an S-corporation pay SE taxes on the portion of distributions that are classified as salary or wages.

Individual Income Tax Rates

$12,000/$24,000 single/joint standard deduction

10% above standard deduction

12% starting at $19,050

22% starting at $77,400

24% starting at $165,000

32% starting at $315,000

35% starting at $400,000

37% starting at $600,000

Rates and brackets sunset 12/31/25

$6,350/$12,700 single/joint std. deduction

10% above standard deduction

15% starting at $18,650

25% starting at $75,900

28% starting at $153,100

33% starting at $233,350

35% starting at $416,700

39.6% starting at $470,700

Sect. 179 Small Business Expensing

Permanently increases the amount of expenditures that can be deducted to $1 million and increases the expenditure level at which the deduction begins to phase out to $2.5 million. Both levels are indexed for inflation.

Allows farmers to immediately write-off the cost of new and used machinery and equipment, livestock, single-purpose agricultural and horticultural structures, and bulk storage facilities for commodities and fuel. The current deduction is limited to $500,000 with the deduction beginning to phase out at $2 million.

Immediate Expensing (Bonus Depreciation)

Allows businesses to fully and immediately write off business investments through 2022. After 2022, this percentage reduces by 20% each year until bonus depreciation is eliminated beginning in 2027. Expands the deduction to include used equipment.

Businesses can take 50 percent “bonus depreciation” in 2017, 40 percent is 2018 and 30 percent in 2019. All farm structures qualify for the bonus depreciation. Fruit and nut-bearing trees, vines, and plants can take the deduction when planted rather than waiting until they become productive.

Deduction for Business Interest Expenses

Limits the interest deduction for businesses with more than $25 million of gross receipts by disallowing a deduction in excess of 30 percent of the businesses’ adjusted taxable income. Carryover rules are available so as to apply the excess interest expense to future years.

Provides the option to elect an alternative to the gross receipts test and instead use an alternative depreciation system for property with a recovery period of ten years or more.

Businesses can claim a deduction for interest expenses.

Estate Taxes

Doubles the estate tax exemption to $11 million per individual and indexes the exemption for inflation. Sunsets 12/31/25.

Stepped-up basis is continued as is the transfer of any unused exemption amount to a surviving spouse.

The current exemption is $5.49 million per individual indexed for inflation. Stepped-up basis is applied to inherited assets. Any unused exemption can be transferred to a surviving spouse.

Net Operating Loss

Net operating losses will be allowed to be carried back for 2 years. NOLs can be carried forward indefinitely but will be limited to 80% of income.

Farm net operating losses can be carried back 5 years. They can be carried forward 20 years.

Taxation of Pass-Through Businesses (Sole-proprietors, partnerships and S-corps.)

Individuals operating pass-through businesses will be able to take able to take a deduction for 20% of their business income through 12/31/2025.

-Business income includes payments from cooperative, commodity wages and farmland rental income.

-The deduction can be carried forward in loss situations.

-The deduction is limited to 50% of W-2 wages paid to employees OR the sum of 25% of W-2 wages paid plus 2.5% of depreciable business property.

- The W-2 limitation does not apply for taxpayers when their income does not exceed $315,000/$157,000 joint/individual and would be completely phased out when income reaches $415,000/$207,000 joint/individual.

-The deduction is not available to individuals who own many service businesses, for example veterinarians, with income over $150,000. The deduction for service businesses starts to phase-out at $50,000 of income.

- Cooperatives will be allowed to take the 20% deduction when determining their taxable income.

-Trusts and estates will be eligible for the 20% deduction.

Profits from pass-through businesses are taxed at individual rates.

10% after $6,350/$12,700 standard deduction

15% starting at $18,650

25% starting at $75,900

28% starting at $153,100

33% starting at $233,350

35% starting at $416,700

39.6% starting at $470,700

Alternate Minimum Tax (AMT)

-Retains individual AMT but increases threshold used to determine when AMT is owed.

Sunsets 12/31/2025.

-Repeals corporate AMT

AMT is a supplemental income tax imposed on individuals and businesses that have exemptions or special circumstances allowing for lower payments of standard income tax.

Depreciation of Farm Machinery

Shortens the depreciation period for farm equipment and machinery to 5 years.

The depreciation period for farm equipment and machinery is 7 years.

Deduction for Replanting Citrus

Temporarily allows citrus growers to expense the cost of replanting groves that have been destroyed by citrus greening though 12/1/27.

The cost of replanting orchards must be capitalized and depreciated once the tree is productive.

Taxation of Craft Beverages

Incorporates the Craft Beverage Moderation and Tax Reform Act to streamline regulations for producers of craft beverages through 12/31/19

N/A


Follow Market Intel on Twitter: @FBMarketIntel