How Do Taxpayers Compare Under Old Law and New Law?

I have gotten several emails and phone calls regarding providing a simple chart showing how the new law compares to the old law for farmers and taxpayers.  I also have gotten a few emails saying they would like to see examples for non Schedule F farmers.  I tend to use Schedule F as a generic term.  Everything that I am showing for a Schedule F farmer will apply to any type of non-corporate entity.

Therefore, my examples will work for an S corporation, partnership, LLC taxed as a partnership or S corporation, a Schedule C, a Schedule F, a trust, an estate and about any other type of flow-through entity.  When dealing with Section 199A including the cooperative part of the deduction, it is usually just easier to refer to it as a Schedule F, but realize it works for the other entities.

A couple of other observations.

First, the items of income and loss, cooperative income, wages and qualified property for S corporations and entities taxed as a partnership will flow through to the owners on Schedule k-1.  This is very similar to the current Section 199A rules.  However, there is no net calculation done at the entity level since the limitations are applied at individual, trust or estate level.  We will need IRS guidance on all of this detail.

Second, the regular Section 199A deduction appears to be a calculation on an entity-by-entity basis.  We are not sure if self-rental arrangements will qualify for the Section 199A deduction.  And even if they do, since they are in a separate entity, the income may not even qualify for the deduction.  Let’s look at an example:

ABC Corporation, an S corporation farms land owned by XY partnership, the husband-wife owner of ABC.  ABC earns $50,000 and pays cash rent to XY of $500,000.  The couple have taxable income of $550,000.  Let’s assume that ABC has paid at least $100,000 of wages, so there is no limitation on its income, therefore, the Section 199A deduction for the ABC income is $10,000.  On XY, there are no wages or qualified property (land does not count).  This results in no Section 199A for XY and taxable income ends up at $540,000 ($50,000 + $500,000 – $10,000).

Now, if the couple could aggregate the income from XY and ABC and have wages of at least $220,000, the couple could have a $110,000 Section 199A deduction dropping their taxable income to $440,000.

Following is a table that shows what a C Corporation would pay under old law assuming a Section 199 DPAD deduction and what it will pay under the new law with the lower tax rate and no Section 199A deduction.  We then compare it to a pass-through entity.


As you can see, a corporation paying the highest tax rate on income under the old law would owe $318,500 of tax (ignoring phase-outs of lower rates) on $1 million of income before the Section 199 DPAD.  Under the current law, even though the corporation gets no Section 199A deduction, its total tax liability does drop from $318,500 to $210,000 or a savings of $108,500 or a drop in tax of 34%.

Now for a farmer or any other pass-through entity.  If they qualified for the Section 199 DPAD under the old law, their total tax liability under the old law was $360,360.  Under new law with the new Section 199A and a lower top tax rate, their liability drops to $296,000, or a $64,000 savings or 17.86% reduction.

However, if they qualify for the new Section 199A deduction, it effectively eliminates their taxable income.

Remember, these are just examples based on the reading the new Code.  There continues to be a lot of chatter about changing part of this new law, but for now it is the law.

  • Principal
  • CliftonLarsonAllen
  • Yakima, Washington
  • 509-823-2920

Paul Neiffer is a certified public accountant and business advisor specializing in income taxation, accounting services, and succession planning for farmers and agribusiness processors. Paul is a principal with CliftonLarsonAllen in Yakima, Washington, as well as a regular speaker at national conferences and contributor at agweb.com. Raised on a farm in central Washington, he has been immersed in the ag industry his entire life, including the last 30 years professionally. In fact, Paul drives combine each summer for his cousins and that is what he considers a vacation. Leave a comment for Paul. If you would like to leave a comment for Paul, follow the link above, however, please make sure to include your email address so that he can reply to your comment (your email address will not automatically show up).

Comments

In every example you have presented related to the deduction for Co-op sales, you do not apply any limitation for wages paid. Wouldn’t the deduction still be limited to 50% of wages paid, and therefore, prevent taxable income from going to zero?

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