Crops or Livestock – It Does Not Matter
We got the following comment from a reader:
“Can you discuss Section 199A on cattle feedlots, contract hog feeders or custom harvesters? There is adequate information on grain producers, but little information for livestock producers.”
We have gotten similar questions before and I thought it would be good to review this in a blog post.
The answer is “There is no difference between farm or ranch operations.” The calculations under Section 199A are exactly the same whether the farmer/rancher grows crops or raise livestock. Remember, this is Qualified Business Income (QBI). The only requirement is that there is business income and then you do the calculations.
The bottom line: If you are under the threshold, add up all of your net income from all business operations. Multiply it by 20% and compare that number to your bottom line ordinary taxable income before the deduction and the lesser of those two numbers is your deduction.
If you are in or over the threshold, then you need to determine if you have any limit on the deduction due to wages or investment in qualified property.
Finally, both crop or livestock farmers/ranchers may have sales to a cooperative. In that case, there will be at least two or possibly three additional calculations for 2018 related to these sales:
- The rancher/farmer does not get to use any of the sales to the cooperative between January 1 and the cooperative’s 2018 year-end in calculating Section 199A,
- They need to reduce their regular Section 199A deduction by the lesser of:
- 9% of QBI related to cooperative payments, or
- 50% of wages allocated to cooperative net income,
- They get to deduct the DPAD (either Section 199 or 199A) passed through from the cooperative (limited to 100% of taxable income including capital gains).
The above calculations apply to all farmers or ranchers who sell to a cooperative.
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.
Thanks for the post. Just clarifying, 1245 gains on sales of purchased, depreciated, breeding livestock IS included in QBI, correct?