How the Tax Bill Affects Patrons
This post is the second one done by Rebecca Smith, our director for Cooperative taxation.
The tax reform package has finally been signed into law. Our previous blog discussed how the tax bill affects coops, this post will discuss how the tax bill affects patrons.
Tax Reform appears to be a win for individuals doing business with a cooperative, especially due to a new deduction on qualified business income. A key change for patrons is the repeal of the Section 199 deduction which was often passed through to them from a cooperative. Other changes include additional expensing for depreciable business assets, an increased standard deduction, limited itemized deductions, and a decrease in tax rates.
Deductions
- Repeal of Section 199 deduction
- Effective for taxable years beginning after December 31, 2017
- 20% deduction for qualified business income (New) – To be discussed in detail in our next post
- Limitation on business interest
- Effective for tax years beginning after December 31, 2017
- Exempt from limitation = Average annual gross receipts under $25M during the three preceding years, indexed for inflation
- Deduction for business interest shall not exceed the sum of
- Business interest income plus
- 30% of adjusted taxable income (cannot be less than zero)
- Determined at the tax filer level; however for pass through entities the determination is made at the entity level
- Business interest = Interest paid or accrued on indebtedness properly allocable to a trade or business; does not include investment interest
- Adjusted taxable income = taxable income excluding business interest expense, business interest income, net operating losses, the 20% deduction for qualified business income, and other adjustments as proved by the Secretary of Treasury (for tax years beginning after December 31, 2017 and before January 1, 2022 deductions for depreciation and amortization are excluded from taxable income)
- Carryforward – If disallowed treated as business interest paid or accrued in the succeeding tax year (indefinite)
- Irrevocable election out
- Specified agricultural or horticultural cooperative
- Farming business (trade or business involving cultivation of land or the raising or harvesting of any agricultural or horticultural commodity)
- Required to use ADS to depreciate any property with a recovery period of 10 years or more (Effective tax years beginning after December 31, 2017)
- Expensing depreciable business assets
- Section 179
- Effective tax years beginning after December 31, 2017
- Maximum expensing = $1M
- Phase-out threshold amount = $2.5M
- Includes qualified real property
- 100% expensing
- Cost of qualified property acquired and placed into service after September 27, 2017 and before January 1, 2023
- New and used property
- Extending by four more years
- 2023 = 80%
- 2024 = 60%
- 2025 = 40%
- 2026 = 20%
- Transition rule = first taxable year ending after September 27, 2017 may elect 50% allowance instead of 100%
- Certain farm property
- Effective for property placed in service after December 31, 2017
- 5 year recovery for any machinery or equipment used in a farming business (Excludes grain bin, cotton ginning asset, fence, or other land improvement)
- Original use commences with taxpayer
- Repeals required use of the 150DB method for 3, 5, 7, and 10 year property
- “Farming business” = trade or business involving cultivation of land or the raising or harvesting of any agricultural or horticultural commodity
- 15 year recovery period and straight line depreciation for qualified improvement property for property placed in service after December 31, 2017 (20 year for ADS)
- Section 179
- Increase in standard deduction
- $24K MFJ, $18K HOH, $12K all other individuals
- Effective tax years beginning January 1, 2018 to December 31, 2025
- Repeal deduction for personal exemptions
- Effective tax years beginning January 1, 2018 to December 31, 2025
- Itemized deductions
- Effective tax years beginning January 1, 2018 to December 31, 2025
- Medical expenses – 7.5% threshold for deducting (tax years beginning January 1, 2017 and ending before January 1, 2019)
- State tax deduction – Up to $10K deduction on the aggregate of state and local property taxes and state and local income taxes or sales taxes
- Home mortgage interest deduction
- Acquisition indebtedness incurred after December 15, 2017 – No more than $750K
- Suspends deduction on home equity indebtedness
- Charitable contributions – Increase percentage limit from 50% to 60%
- Suspends all miscellaneous itemized deductions subject to the 2% floor
- Repeals the overall limitation on itemized deductions
- Limitation on losses
- Effective tax years beginning January 1, 2018 to December 31, 2025
- Excess business losses are not allowed and are carried forward
- Excess business losses are those over a net of $500K MFJ or $250K all other taxpayers
- Carryovers are allowed up to the lesser of the carryover amount or 80% of taxable income (Effective tax years beginning January 1, 2018)
- Applies after the application of the passive loss rules
Tax Rate and AMT
- Individual income tax rates
- Seven brackets, ranging from 10% to 37%
- Effective tax years beginning January 1, 2018 to December 31, 2025
- Retains present law for net capital gains and qualified dividends tax rates
- Alternative Minimum Tax
- Effective tax years beginning January 1, 2018 to December 31, 2025
- Increases the exemption amount and related phase out thresholds
- Exemption amount = $109.4K MFJ, $70.3K all other taxpayers
- Phase out thresholds = $1M MFJ, $500K all other taxpayers
Credits
- $2,000 child tax credit per qualifying child ($1,400 maximum refundable amount)
- Effective tax years beginning January 1, 2018 to December 31, 2025
- Phase out begins at $400K MFJ, $200K All other filers
Other
- Like kind exchanges
- Limits its application to real property not held primarily for sale
- Exchanges completed after December 31, 2017
- Estate and gift tax
- Effective for decedents dying and gifts made beginning January 1, 2018 to December 31, 2025
- Basic exclusion is $10M and indexed for inflation (approx. $11.2M in 2018)
- Retains step up in basis for inherited assets
- Repeal Individual mandate – Months beginning after December 31, 2018
- Accounting methods
- Effective for taxable years beginning after December 31, 2017
- Annual average gross receipts do not exceed $25M for the 3 prior taxable-year period
- Can use cash method
- Not required to account for inventories under section 471
- Exempt from uniform capitalization rules
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 Walla Walla, 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. Paul and his wife purchase an 180 acre ranch in 2016 and enjoy keeping it full of animals.
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