The Tax Cuts and Jobs Act (TCJA), passed by Congress in December of 2017, represents the largest change to our tax code in 30 years and touches just about every taxpayer in every industry. Here is a look at some provisions of the Tax Cuts and Jobs Act that will impact agriculture and farming.
Expanded Section 179 Equipment Expensing
Beginning with the 2018 tax year, farmers and agricultural businesses purchasing capital such as breeding livestock, farm equipment and single-purpose structures can immediately write off the cost of those investments. The limit for Section 179 expensing doubled from $500,000 to $1 million and isn’t phased out until the business reaches $2.5 million in purchases.
Interest Deduction Limitation
Businesses will be limited in deducting interest expense when their annual gross receipts exceed $25 million. For affected farmers and agricultural concerns, the interest deduction will be limited to business interest income plus 30% of adjusted taxable income. Any disallowed interest can be carried forward indefinitely.
Farmers may consider an irrevocable election to avoid that limitation. However, to take advantage of the election, they will have to use the alternative depreciation system (ADS) on farm property with a recovery period of 10 years or more.
Farms and agricultural companies organized as pass-through entities (S-Corps, Partnerships, LLCs and ) may be entitled to a 20% deduction to offset ordinary income. The deduction may be limited based on income, W-2 wages paid and capital investments.
Repeal of Domestic Production Activities Deduction
The TCJA permanently eliminated the Section 199 deduction, commonly known as the Domestic Production Activity Deduction (DPAD). a maximum of 9% of “qualified production activities income” and was limited by wages paid.
Agricultural organizations loudly opposed the repeal and their concerns were addressed with a new deduction available to agricultural and horticultural cooperatives. In addition to the pass-through deduction available at the individual level, cooperatives can claim a 20% deduction on gross income less payments to patrons when calculating taxable income. The deduction is limited based on wages paid and capital investments.
Changes to Individual Income Tax Rates
According to the American Farm Bureau Federation, 94% of farmers and ranchers pay taxes as individuals, rather than at the business level. Not only will they benefit from the pass-through deduction, but they may see their individual income tax rates come down as well. The top individual income tax rate is reduced from 39.6% to 37% and the amount of income covered by the lower brackets has expanded upward.
The TCJA’s changes to the tax code are extensive. This is just a small sample of the changes that could impact agriculture and farming, and we’re sure to see more guidance and interpretation coming from the IRS and states. We encourage farmers and agricultural business owners interested in the new law to discuss changes with their tax professional to gain a deeper understanding of how the TCJA will impact their business and their family.
ABOUT THE AUTHOR
Randy is a Principal and the Tax Director at Brown Schultz Sheridan & Fritz and is one of the key members of the Firm’s Tax Department. He is responsible for managing tax consulting and compliance services for his clients as well as overseeing the tax department.