As producers prepare to file federal income taxes for the first time under the Tax Cuts and Jobs Act, we asked Paul Neiffer, CPA and principal at CliftonLarsonAllen LLP, to revisit the law and its potential impact on farming and ranching operations.
His original “Six Questions to Ask Your Tax Advisor” serve as a starting point for understanding the new law. In the months since, more details about the law have emerged. Below, Neiffer outlines additional features to discuss with your tax advisor as you prepare your 2018 tax return:
Bonus depreciation. The ability to deduct 100 percent of depreciable property, including equipment, tiling, grain bins, livestock buildings and used machinery, might seem attractive. But use caution in offsetting all your income.
Income. To take advantage of some deductions, such as the 199A Qualified Business Income deduction and child tax credits, you must report some income. The 199A has increased in complexity. Be aware of what qualifies as business income under the new law (e.g., the treatment of rental income, crop share, guaranteed wages/income). Neiffer said some producers are pulling deferred grain sales into 2018 to create income.
Business Losses. Agricultural operations remain the only businesses that can carry excess business losses back. But the timeframe has shrunk from five to two years. By comparison, producers can carry losses forward over an unlimited number of years. Whether you carry back or forward, these losses can offset only 80 percent of taxable income. A limit of $250,000 (single) or $500,000 (married) applies.
Self-employment tax. Factor self-employment taxes into decisions because they qualify you for Social Security and federal disability and retirement benefits, Neiffer said. Many farmers will show losses on their 2018 returns.
“Using the optional self-employment tax approach means you pay about $800 in self-employment tax and qualify with four credits for Social Security retirement and disability benefits,” he said. “This is especially important for young producers starting out.”
Kid wages vs. gifts of grain. Wages of up to $6,500 for children used to be exempt from federal taxes. Under the new law, wages of up to $12,000 for children are exempt. By comparison, gifts valued at more than $5,000 may increase a child’s tax liability under the new law. Wages also qualify for deposit into a Roth IRA, which could represent a substantial benefit by retirement age.
Ownership structure. If you consider a change of business ownership structure, be sure you and your advisers think through how that will impact other aspects of your business, including income tax, self-employment tax, FSA and estate taxes. For instance, the ARC and PLC programs are subject to a $125,000 limit. For general partnerships that applies to each member; LLCs and S corporations have one limit regardless how many people are involved. In addition to changes in tax laws, producers also need to be mindful of provisions in the recently passed Farm Bill, which are in effect through 2025. The definition of family, for example, was broadened to include nephews, nieces and first cousins.
If you do change business structures, remember to update records at FSA and RMA in a timely manner.
“Overall, we think it may be prudent to hold off any major changes in structure until you better understand all the implications of this tax law,” Neiffer said.
Filing date. Many farmers will have trouble filing their return by March 1, especially if they operate in “nonconforming” states, meaning their state tax laws don’t align to the fed’s. The fact that IRS has not completed some necessary forms also poses challenges to timely filing.
Neiffer said operators might consider pushing their filing deadline to April 15. To do this, producers have until January 15 to pay the lesser of two options: 100 percent of last year’s taxes or two-thirds of this year’s estimated taxes. Miss this deadline and you will be assessed 6 percent of your estimated taxes as of January 15.
Don’t procrastinate. This is a year when the help of a tax professional will be valuable. Don’t delay in seeking advice.