Editor’s note: This is the second part of a two-part article. The first part was published in the Jan. 31 issue of Agri-View.
The Tax Cuts and Jobs Act signed Dec. 22, 2017, changed some tax laws that impact farmers. The new law provides many taxpayers, including farmers, a deduction for certain business income from a qualified trade or business (referred to as section 199A(a)). Taxpayers, including eligible farmers, may be entitled to a deduction of up to 20 percent of certain business income from domestic businesses operated as sole proprietorships or through partnerships, S corporations, trusts and estates.
Eligible taxpayers may also be entitled to a deduction as much as 20 percent of qualified real estate investment-trust dividends and qualified publicly traded partnership income. Most eligible taxpayers can claim the deduction for the first time on the 2018 federal income-tax return they file in 2019.
There are several things farmers should know about the deduction.
- The deduction for income from a qualified trade or business operated directly or through a pass-through entity generally is available to married couples filing a joint return with taxable incomes not exceeding $315,000 and other filers with taxable incomes not exceeding $157,500 in 2018.
- For taxpayers with taxable income that exceeds those levels, the deduction is subject to limitations such as the type of trade or business, the taxpayer’s taxable income, the amount of W-2 wages paid by the qualified trade or business, and the unadjusted basis immediately after acquisition of qualified property held by the trade or business. Income earned through a C corporation or by providing services as an employee is not eligible for the deduction.
- The deduction may also be available for certain income distributed to eligible patrons from cooperatives, though there may be a limitation on that deduction.
Legislation passed in March 2018 also provides that certain agricultural or horticultural cooperatives – Specified Cooperatives – and their patrons may receive a deduction for income attributable to domestic production activities similar to the now-repealed Section 199 domestic-production activities deduction referred to as Section 199A(g). When a Specified Cooperative is eligible for section 199A(g), the patrons of the Specified Cooperative may be required to reduce their 199A(a) deduction.
Depreciation – Some depreciation rules have changed for farming property placed in service after Dec. 31, 2017, in tax years ending after Dec. 31, 2017. Farmers are no longer required to use the 150 percent declining-balance method of depreciation for 3-, 5-, 7- and 10-year property used in a farming business. The 150 percent declining-balance method of depreciation will continue to apply to any 15-year or 20-year property used in the farming business to which the straight-line method of depreciation does not apply – or to property for which the taxpayer elects to use the 150 percent declining-balance method of depreciation.
The recovery period was shortened from seven to five years for any machinery or equipment other than any grain bin, cotton-ginning asset, fence or other land improvement used in a farming business, the original use of which commences with the taxpayer after Dec. 31, 2017.
A farming business that elects out of the business-interest limitation of Section 163(j) must use the alternative depreciation system provided in Section 168(g) to depreciate certain property.
Losses – Excess-business-loss rules replaced the prior excess-farm-loss rules. For taxable years after Dec. 31, 2017, through Dec. 31, 2025, noncorporate taxpayers may be subject to excess-business-loss limitations. The new loss limitation does not require the receipt of any applicable subsidy as defined under prior law. Instead it considers taxpayer net losses from all their businesses. Any disallowed loss resulting from the new limitation is treated as a net operating-loss carryover to the next taxable year. Taxpayers determine their deductible business loss by applying limitations in the following order.
- at-risk rules
- passive activity loss rules, and
- excess business loss limitation rules
Under transition rules if a farmer had an excess farm loss in 2017, the farmer must use it in calculating the profit or loss for 2018 before applying the excess-business-loss rules. He or she will report the computation of the excess-business-loss adjustment on Form 461.
Net operating loss deduction – Net-operating-loss rules have changed. For losses arising in taxable years beginning after Dec. 31, 2017, the new law limits the net-operating-loss deduction to 80 percent of taxable income, determined without regard to the deduction. Any net operating loss that is a farming loss is carried back two years instead of five years. A farmer can make an election to instead carry over the loss to subsequent years. A farmer can carry forward a net operating loss indefinitely.
Like-kind exchanges – Prior to Jan. 1, 2018, farmers may have been involved in like-kind exchanges involving farm machinery or equipment. The rules have changed. Beginning after Dec. 31, 2017, Section 1031 like-kind exchange treatment applies only to exchanges of real property held for use in a trade or business or for investment, other than real property held primarily for sale.
Gross receipts test – For tax years beginning after Dec. 31, 2017, a farmer meets the gross-receipts test if the farmer has average annual gross receipts of $25 million or less – indexed for inflation – for three prior tax years and is not a tax shelter.