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Farmers, Don’t Miss the ‘Bonus Depreciation’ Tax Benefit

If your farming operation is a C corporation, congratulations.

Everyone is buzzing about the recent changes in the tax code. How will it affect me? Will I be better off or worse off? How will the changes affect my tax strategies? The following list is certainly not comprehensive, but it covers the basic changes that affect most people.

First of all, there are still seven tax rates, but most of them were reduced. The current tax rates of 10%, 15%, 25%, 28%, 33%, 35%, and 39.6% were reduced to 10%, 12%, 22%, 24%, 32%, 35%, and 37.0%. As you can see, the 10% and 35% rates stay the same. However, taxpayers in all of the brackets, including 35%, are better off because several portions of their income will be taxed at lower rates.   

If your farming operation is a C corporation, congratulations. Your top corporate tax rate, which previously peaked at 39%, just moved down to a flat 21%. I suspect that some operations, who were previously uncertain about changing to a C corporation, will go ahead and do it. However, this rate decrease still does not eliminate the double-taxation issue – you pay 21% on corporate profits and also pay 15% or more if you pull a dividend out of the corporation.

The elimination of the domestic production deduction is one negative that comes from the new tax bill. Prior to 2018 there was a deduction of up to 9% of revenue for companies that produced products, such as grain. That is gone for 2018, but it’s replaced with something better than a 9% deduction: Most small businesses will receive a 20% deduction off of qualified business income.  This does not apply to certain high-income service business owners, but it does apply to farmers.  Paying tax on only 80% of net profit should be a nice income tax savings for most farmers.

Did the tax code get simpler overall? Probably not, but certain aspects did. Previously, you could carry net operating losses back three years, which was difficult for tax preparers to track and execute. Now, those losses will carry-forward for an unlimited number of years. Personal exemptions have gone away for 2018, but the child tax credit has been doubled from $1,000 per child to $2,000 per child. The penalty for not having health insurance (which was primarily paid by poor folks) has been eliminated.

Some miscellaneous itemized deductions have been eliminated. For instance, W-2 employees with unreimbursed expenses, such as mileage or tools, will not be able to deduct them. The highly publicized limit on state and local taxes will certainly ding the ability of many people to itemize. In places like Illinois, a number of people pay $10,000 real estate tax bills before adding state income taxes. However, the standard deduction for a married couple is nearly doubled for 2018, now $24,000. So, most people who lose their ability to itemize will make up for it with a higher standard deduction and lower tax rates.  

In spite of the changes, there are still opportunities to itemize: charitable contributions, home mortgage interest on loans of up to $750,000, and medical expenses above 7.5% of AGI. So, before shredding your 2018 receipts, consider whether itemizing is still in play in your situation.

One nice bonus for farmers is a “bonus depreciation.” In 2017 you could write off 50% of any new equipment costs. For 2018 that write-off has been raised to 100% and applies to new or used equipment. Caveat, just because you can write something off in one year doesn’t necessarily mean you should.

Lastly, certain family farmers have just experienced a HUGE benefit. The estate tax exclusion has been doubled to $11 million, which makes estate taxes now irrelevant for farming operations valued between $5.5 million and $11 million.

 

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