Qualified Business Income Deduction Nuances
Today’s guest blogger is Chris Hesse. Like Paul, Chris was raised on a farm; his family continues to farm in the Moses Lake, Washington area. Chris is the Vice-Chair of the Tax Executive Committee of the American Institute of CPAs. He is a principal in the National Tax Office of CliftonLarsonAllen.
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While Paul is in South Africa for a couple of weeks, playing with lions and tigers and bears (oh my!—not really, just lions, elephants, giraffes and the like), we’ll keep you posted on other farm news. On the Section 199A, Qualified Business Income Deduction, we remind of some nuances.
- First, if there is no net taxable income on the tax return, there is no deduction.
- Second, if there is no taxable income other than income taxed at capital gain rates, there is no deduction.
- Third, if there is income, but the business activity is a net loss, there is no deduction, but the net loss will reduce the next year’s Section 199A deduction.
Until Congress fixed the “Grain Glitch,” taxpayers with tentative taxable income less than $157,500 ($315,000 for married filing joint) didn’t have to worry about qualified wage expenses, computing income from separate trades or businesses, or whether a business was a specified service business. Due to the Fix, farmers receiving income from ag or hort cooperatives (patronage dividends or per-unit retains) must determine a reduction in the 20% deduction if the farmer has qualified wages. This is the case even if the farmer didn’t receive a pass-through DPAD deduction from the cooperative.
Paul has written about this in the past; take a look at his post, Additional Section 199A Guidance, from April 1, 2018.
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.
As with most targeted provisions of the Internal Revenue Code, the tax reform gain deferral and gain exclusion provisions for opportunity zone investments are complex and detailed. Tax reform provides for the temporary deferral of capital gains which are reinvested in a Qualified Opportunity Fund. The gain can be deferred for up to 7 years. And additional gains from the investment in the Opportunity Fund can qualify for permanent exclusion if held for ten years. The investment has to be made within 180 days of when the taxpayer sold the original property.
The Opportunity Fund is a corporation or partnership organized for investing in Qualified Opportunity Zone property, which has to be certified. Many more details. Taxpayers interested in Opportunity Fund investments need to visit with their tax and investment advisers. Opportunity zones are low-income areas designated by the states.