LINCOLN, NEB. – The new Tax Reform package offers a number of important changes for those in agriculture and Nebraska Farm Bureau has been very involved in making sure farmers and ranchers benefit from Congress’s first major tax reform package in more than 30 years. It is truly a “win” for Nebraska farm and ranch families, Steve Nelson, president of Nebraska Farm Bureau said, when President Trump signed the bill Dec. 22.
Nebraska Farm Bureau staff, Jay Rempe, senior economist and Jordan Dux, director of national affairs, conducted an analysis of the Tax Reform package and provides 10 important things farmers and ranchers need to know about the new tax package. It’s important to keep in mind that Nebraska Farm Bureau has made every effort to ensure the accuracy of the information provided. As with anything, farmers and ranchers should consult a tax professional in order to fully examine how these new changes affect their individual operations.
1. Lower Rates for Pass-Through Businesses, Individuals, and Corporations – The new law continues seven tax brackets for individuals and all pass-through business income (sole proprietorships, partnerships, and S-corporations) but expands them and lowers tax rates which are indexed for inflation. The law also doubles the standard deduction. Unfortunately, the new pass-through rates and brackets do expire on December 31, 2025. Pass-throughs will be able to deduct 20 percent of their business income, which includes payments from cooperatives, commodity wages, and farmland rental income.
The following limitations will apply:
- The deduction is limited for partnerships and S-corporations to 50 percent of W-2 wages paid to employees OR the sum of 25 percent of W-2 wages paid plus 2.5 percent of depreciable business property.
- The W-2 limitation does not apply to taxpayers when taxable income does not exceed $315,000/$157,000 joint/individual and would be completely phased out when income reaches $415,000/$207,000 joint/individual.
- The deduction is not available to some service businesses, for example, veterinarians with taxable income over $150,000. The deduction for service businesses starts to phase out at $50,000 of income.
C-Corporation Businesses: The law sets the corporate tax rate at a flat 21 percent instead of the current 15 percent, 25 percent, 34 percent, and 35 percent brackets.
Implications for 2017: Depending on your individual circumstances, farmers and ranchers may want to consider deferring income to next year as the lower rates take effect for the 2018 tax year.
2. The Ability to Make Capital Investments Has Improved – The new law permanently increases the amount of expenditures than can be deducted using Sect. 179 small business expensing from $500,000 to $1 million and increases the expenditure level at which the deduction begins to phase out from $2 million to $2.5 million indexed for inflation.
Immediate Expensing (bonus depreciation): Farmers and ranchers generally use bonus depreciation when expenditures exceed the Sect. 179 small business deduction limits. All farm structures qualify for the bonus depreciation deduction. The bill allows businesses to fully and immediately write off business investments through 2022 and expands the deduction to include used as well as new purchases. After 2022, the percentage deduction reduces by 20 percent each year until bonus depreciation is eliminated beginning in 2027.
Depreciation of Farm Machinery: The bills shorten the depreciation period for farm equipment and machinery from seven to five years.
Implications for 2017: Farmers and ranchers might consider making some year-end purchases of new or used equipment. The new law’s effective date for the expanded bonus depreciation rules start for property purchased on or after September 28, 2017.
3. Farmers and Ranchers Can Still Fully Deduct Their Property Taxes – If you normally expense your property taxes on agricultural land and other business property on a Schedule C, E, or F, you will continue to be able to fully deduct them. The new law does limit an individual’s ability to deduct their local property taxes and state income taxes at a combined $10,000, for those who itemize deductions.
4. While Not Eliminated, the Estate Tax Exemption is Doubled – The new law doubles the estate tax exemption from $5.49 million to $11 million and indexes the exemption for inflation. Unfortunately, the increased exemption expires on December 31, 2025. The bill does not change current stepped-up basis rules.
5. Cash Accounting Expanded – The law expands the number of farm corporations and farm partnerships with a corporate partner that will be able to utilize cash accounting.
6. 1031 Exchanges are Continued for Real Property – The new law continues like-kind exchanges for buildings and land, however it would end for equipment and livestock.
7. Most Farms and Ranches Can Continue to Deduct Business Interest – The new law continues the interest deduction for businesses with less than $25 million of gross receipts indexed for inflation. Carryover rules are available to apply the excess interest expense to future years.
9. Obamacare Mandate is Repealed and Health Care Deduction is Maintained – The bill’s repeals of the individual mandate by removing the penalty for individuals who do not purchase health insurance. The new law also maintains the deduction for medical expenses for those who itemize deductions.
New Limits on Net Operating Losses (NOL) – The new law allows NOL to be carried forward indefinitely instead of current law 20 years but limits NOL to 80 percent of income. NOL can be carried back for two years instead of the five years as currently allowed for farms and ranches.
Implications for 2017: This should be discussed with your accountant.
10. Section 199 is Eliminated, but a Fix was Included. The new law allows farmers to receive a 20 percent deduction on all payments from a farmer cooperative. The deduction cannot exceed the taxpayer’s taxable income for the year. The cooperative will then receive a 20 percent deduction on gross income less payments to patrons, limited to the greater of 50 percent of wages, or 25 percent of wages plus 2.5 percent of the cooperative’s investment in property.