Will You Need to Change Year-Ends?
The proposed regulations on Section 199A has both good and bad news for farmers that have multiple entities and have taxable income over the threshold amount. If your rental activity is part of a controlled group, then your rental income automatically qualifies as qualified business income (QBI). If your income is under the threshold amount ($315,000 for married couples, $157,500 for all others), then this is really all you worry about. You simply add all of your QBI from the farm, rental entity, etc. and multiply by 20% and this is your tentative deduction. It will then be limited to 20% of ordinary taxable income plus any DPAD from a cooperative minus the cooperative adjustment if any.
Here is a quick example. Jim, a married farmer, has Schedule F farm income of $100,000 and rental income from his LLC of $200,000 (part of a controlled group). His ordinary taxable income is $250,000. His final Section 199A deduction is $50,000 ($300,000 times 20% is $60,000, but it is limited to $50,000 ($250,000 times 20%).
For purposes of determining whether your rental income qualifies as QBI it does matter what year-ends any of your entities may have. Also, it appears that a C corporation may be the farm operator. That will still allow the rental income to qualify as QBI. The proposed regulations simply require you to be part of a controlled group.
However, if you are over the threshold, you then worry about your entities year-ends. In order to aggregate, all of the entities in the combined group must have the same year-end. Also, none of the entities can be a C corporation. Therefore, if your farm operation has all of the labor and your land rental has all of the income, then you will end up with no Section 199A deduction unless you are able to aggregate. If your entities have different year-ends, you are out of luck.
Taking our previous example, let’s assume that Jim’s taxable income is $500,000. The LLC has no wages or qualified property, therefore, unless Jim can aggregate the entities together, his final Section 199A deduction will drop to $20,000 ($100,000 times 20%). If he is able to aggregate, then his deduction increases to $60,000 (his ordinary taxable income limit is $100,000, so he gets the $60,000).
What should you do? For now, nothing. This is simply a proposed regulation. If the aggregation rules as is becomes final, then likely you will want to change your year-ends to be all the same. However, you only need to do this if your taxable exceeds the threshold. If you are under that number each year, then no change is needed since the wage and investment limit does not apply.
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.
Requesting comments on the safe harbor of controlled groups for QBI. I rent half my owned farms from my wife who owns the other half. From her rent she pays her mortgage, taxes, repairs etc. and shown on her schedule E. I of course file on schedule F . There are no threshold issues. Is this considered safe harbor for QBI.
Wind turbines are going up these farms with yearly rental income. Are these QBI.
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