Landlords – Which is Better, Cash Rent, Crop Share or Custom Farming?
Most landlords over the last several years have usually preferred receiving cash rent on their farmland rather than a share of the crop. The cash rent “guarantees” their return and it is usually paid up front versus having to wait to harvest to “cash” in on the crop.
However, the proposed regulations may change the preference (at least as far as income taxes is concerned). This analysis is only for “stand-alone” landlords. It does not include any landlords that are part of a common group. Those landlords will have their rental income treated as “business” income and thus qualify for the deduction.
Many commentators assumed that all rental income would qualify for the new Section 199A deduction. But the proposed regulations said that the deduction is only for qualified “business” income and rents are generally not business income. Rent income can rise to the level or a trade or business if the landlord performs enough services related to the rental. In the normal farm cash rent arrangement, the landlord almost never performs any services, thus it is not business income.
The bottom line is if you are a cash rent landlord, you will likely not qualify for the 20% deduction assuming the final regulations follow the proposed regulations.
Now for crop share landlords, it may be a little different. Crop share income qualifies for farm income averaging whereas cash rent does not. Also, some other regulations indicate that if the landlord shares in enough of the expenses of the farm, then it is more likely treated as a joint venture and thus, a trade or business.
We believe that crop share landlords that participate in the expenses of the farm will qualify for the deduction. If they simply receive a share of the crop and pay no share of expenses, it will likely be treated just like cash rent and no deduction.
If you custom farm the land, then this should definitely qualify for the deduction. However, in this case, you may be subject to self-employment tax on the net income which will reduce or eliminate the benefit of the deduction. The bottom line is that a crop share will likely be better than custom farming from a tax point, but may be less beneficial from an economic position.
What should you do? For now, nothing since these are still proposed regulations. If the final form is the same, you may want to consider changing to a crop share if the deduction is large enough to reduce your taxable income. Remember that if your income is over a threshold amount ($315,000 for married couples and $157,500 for all others), then no or little deduction will be allowed anyway since you have no wages or qualified property.
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.
have you heard if the DPAD from the Coops passed through to the patron will be taken as a deduction before AGI or combined with the 199A based on taxable income?
If a C Corp rents the land from the shareholders partnership LLC do you think the partnership can use the rental income for the 199A deduction?