Planning for Losses Also Important
Another guest post from Chris Hesse while Paul is in Africa:
Paul has blogged extensively on the Section 199A DPAD and deduction for Qualified Business Income. What about tax reform and losses?
Tax reform eliminated a provision limiting the deductibility of farm losses in excess of $300,000 (generally). However, in its place, tax reform added a provision limiting all business losses (farm and nonfarm) to $250,000 ($500,000 for married couples filing a joint return).
Tax reform also eliminated the net operating loss (NOL) carryback for all taxpayers other than farmers. However, farmers were cut back on the benefit of a net operating loss. Previously, farmers could carryback a NOL five years, to offset high tax rate income (a farmer could choose to carry the loss back two years, if that was more of a benefit, or forgo the entire carryback and choose to carryover). The five-year carryback was eliminated in tax reform. Farmers (and only farmers) can carryback their NOL two years.
Even that benefit, though, was substantially cut back. For losses incurred in years beginning after 2017, the loss available to carryback is limited to $250,000 ($500,000 for married).
Remember also, NOLs generated after 2017 are limited to offset no more than 80% of taxable income in the carryback or carryover year. See Paul’s post on March 20, 2018. Tax planning for losses becomes yet more important. It is better to have a steady amount of income each year than to have income in some years and losses in others.
Example: Alex has a farm loss in 2018 of $600,000 from farm operations and sale of farm equipment (net). As a single person, he can carryback $250,000 of the loss to 2016 (two-year NOL carryback). The remaining $350,000 carries forward to 2019.
In 2019, Alex has $290,000 of income. He can offset the income with $232,000 of loss carryover (i.e., 80% of $290,000), leaving him with $58,000 of income subject to tax. The remaining $118,000 continues to carryover, to 2020.
If, instead, Alex planned on $250,000 loss for 2018, and defer the extra $350,000 of deductions to 2019, he would still carryback his $250,000 loss 2016. His 2019 loss would have been $60,000, which could be carried back to 2017 or carried over to 2020. With the tax planning, he would have no tax liability for either year.
Tax planning involves all years, not just the current year. Planning applies in bad times as well as good. Planning for the target amount of loss saves dollars.
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.
Can you expand on what might constitute a trade or business for the excess business loss rule. Specifically we are concerned with land rentals and whether it will make any difference if the farmer is receiving cash rent or share rent.