We Should Have a Tax Bill

Late Friday night / early Saturday morning, the Senate finally passed a tax bill.  The process of getting this tax bill was not pleasant to watch unfold, but we finally have a bill from the Senate.

Under normal rules and procedures, this bill would go over to a conference committee between the House and the Senate.  However, this is not normal times.  I am predicting that there is at least a 50% chance that the House will simply vote on accepting this bill at some point and then pass it onto President Trump to sign.  In the meantime, I will update you on the major items of importance to farmers that are contained in this bill (we have posted several times before on many of these provisions):

  • Farmers will be allowed to deduct 23% of their net farm income as an additional deduction (up from the original proposal of 17.4%).  There is a limit of 50% of wages paid by the farm business, however, this limit does not apply if your taxable income is less than $500,000 (MFJ).
  • We believe that this deduction may also apply to self-rental income earned by farmers who rent their ground to their farm operation.  We do not have any formal guidance on this, however, the actual code section says “effectively connected with the conduct of a trade or business”, therefore it seems that a farmer’s self-rental income should qualify since it is effectively connected to the farm operation.  Another reason for this conclusion is that the 23% deduction also applies to REIT income.
  • 100% bonus depreciation is allowed on all new farm assets until December 31, 2022.  After 2022, this percentage reduces by 20% each year until bonus depreciation is eliminated beginning in 2017.
  • Section 179 is bumped to $1 million effective for taxable years beginning in 2018 and is indexed to inflation.  The phase-out begins at $2.5 million up from the current $2 million level.
  • Interest expense is allowed for all farm operations with average revenues under $15 million.  If your revenues are over this amount, you can only deduct interest to the extent of 30% of modified income (essentially taxable income plus interest expense and income taxes “EBIT”).  However, any farm operation can elect to deduct 100% of interest expense.  If you make this election, you are forced to use longer depreciation lives and cannot take bonus depreciation.  You are still allowed to take Section 179.
  • 100% bonus depreciation is allowed for new equipment purchases after September 27, 2017.  You can also elect to take 50% on these purchases.
  • Farm equipment lives are now shortened to 5 years from 7 years and you can depreciate them quicker than what is currently allowed( 200% declining balance instead of 150% declining balance).  Due to 100% bonus depreciation and larger Section 179 this may not be much of a change (at least until 2023).
  • Lifetime Estate Exemption is doubled to $11.2 beginning in 2018.  Full step-up continues as is.  The exemption is indexed to inflation and the annual gift exemption remains at $15,000 indexed to inflation.
  • Cooperatives will be allowed to take the 23% deduction in arriving at their taxable income.  This may affect farmers who sell grain through a co-op since this may reduce the amount that they can take the 23% deduction on.
  • The current excess farm loss rules are repealed, however, there is a new overall limit on all business losses of $500,000.  This means that if you are a farmer who has a large amount of income from salaries, etc., you can only offset $500,000 against that income.
  • Regular corporations will now have a top rate of 20% beginning in 2019.  For many farmers, this is actually a 33.33% tax increase since most farmers only report up to $50,000 in a C corporation which is currently subject to a 15% tax bracket.
  • As discussed previously, like-kind exchanges are now only allowed for real property.
  • The 100% deduction for employer provided meals on their premises will drop to zero percent beginning in 2026.
  • Orchardists and vineyards are now allowed to deduct 100% of their preproductive costs as long as your gross average revenues are less than $15 million.
  • Farm net operating losses are allowed to be carried back for 2 years instead of the current 5 years.  Also, you can only offset an NOL carryforward against 80% of your income beginning in 2023.  From 2018-2022 you can only offset 90% of your current income.

There are many other provisions that we have covered previously.  The ones listed above are likely of most importance to farmers.  This is not the bill yet, but if the conference committee is unable to come up with changes that 50 Senators will accept, it is likely the House will simply accept this bill and pass it onto the President to sign.  We will keep you posted.

 

 

  • 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 partner 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.

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Comments

Paul,
Can you explain the 23% and 50% wages scenario. I find it confusing reading the Senate bill text. We are an S-corp farm and pay wages to ourselves. No distributions.

Paul any idea if you have elected out of 263a under current law could you now be eligible for bonus? Difference answer if revenues are in excess of $15M?

So Paul, can i still deduct my realestate landtax as i have in past. In Nebraska that tax is huge?

If this is indeed the bill it could be (and was) far, far worse. We’re breathing a sigh of relief (and, indeed, starting to breathe again) on our Tennessee farm tonight. Thank you for your columns, your insight, and for the past few months for your advocacy.

Paul – Anything new concerning self-employment tax as it relates to rental income?

SE tax on rentals has been removed out of the House Bill. It will remain the same as current law.

What happened to the concept of charging self employment tax on rental income?

the 23% deduction on net farm income, where will this be deducted and does it get deducted before or after se taxes

This will go on page 1 of the form 1040 at the bottom of the page. It will work like the current DPAD deduction. It will not reduce self-employment tax.

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