The Biggest “We Don’t Know Yet”
Today, I will be giving a 75 minute talk in Minneapolis to about 150 CPAs on the new tax law and how it affects farmers. It seems like I am spending more time in hotels than in my house lately. Yesterday, I flew out of Pasco, Washington to Minneapolis. Tonight I fly to Orlando, Florida (at least that will be warm) for two days and then fly to Portland, Oregon Wednesday night for the Tri-State Grain Convention (I speak there Friday morning) and then drive to Yakima, Washington to speak to the PNW Cooperative Accountants.
At least next week I will be in Denver to welcome our first grandchild (a girl and yes, my wife has bought a lot of stuff for this kid since she has four boys and no girls).
Even though I likely have given close to 75 talks on the new tax law this year, there are still several parts of the new Code that we really don’t have an answer for. This post will review some of the most major items.
First, will rental income qualify for the new 20% Section 199A deduction. We know that the rents paid as part of a common group will by default qualify. However, other cash rents, either not paid as part of a common group (brothers and cousins) or paid by unrelated third parties likely will not qualify unless there is enough personal participation by the landlord to bring it up to the level of a trade or business. However, if the landlord does that, then it is likely that this income will now be subject to self-employment tax. For those taxpayers in low tax brackets, paying self-employment tax to simply get a 20% deduction on their rental income will not pay. For those in a higher tax bracket, paying self-employment tax may pay, however, at that point, they may lose the deduction anyway since they have no wages paid or qualifying property for that rental activity and they are unable to aggregate it with other entities that might have wages or qualified property.
It is certainly a Catch-22 situation right now and we are hoping that the final regulations (likely to be here between Thanksgiving and Christmas) will clear this up for us.
Second, will net operating losses be part of the excess business loss rules. We posted on this last week and this can create major problems for farmers and other business owners. In the past, we could offset net operating losses against all of our taxable income. Starting in 2018, we can only offset it against 80% of taxable income which may even be a good thing since that will allow us to pay tax at the 10% and 12% tax-brackets and deduct some Section 199A. However, if we are limited to deducting only $250,000 or $500,000 of NOLs, then they may create a much larger tax liability for farmers when they can least afford it. The regulations on these losses should be coming soon.
Last, will private elevators and other similar businesses who buy and sell grain be treated as a dealer and thus have this income be labeled as specified service trade or business (SSTB) income. Once SSTB income becomes more than 5% or 10% of a companies revenues, then all of its income becomes SSTB and therefore, if the owners are over the threshold, none of the income qualifies for the 20% deduction. Chris Hesse, a principal with CLA, testified before the IRS regarding this issue for the National Grain and Feed Association and their members. We hope that the IRS listened and will fix this issue.
There are certainly other items that we don’t know, but these are the major ones that I see. We will keep you posted as we find answers. Again, the answer may not be what we want, but at least we will know what the answer is.
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.
what are the current farmer/cooperative rules regarding the 20% deduction on the per unit retains (including sales to the cooperative)…was any “fix” accomplished?