Federal Tax Update for Farmers

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U.S. taxpayers saw significant changes on their tax returns last year, and this year is sure to bring changes, as well. 

 

Qualified Business Income Deduction (QBID)

Tax preparers have new forms this year to help us calculate the 20% Qualified Business Income Deduction. This is particularly important for farmers who do business with agriculture cooperatives. In general, a farmer receives a deduction equal to 20% of his net business results. This deduction is reduced by the lesser of 9% of the qualified income related to coops or 50% of related wages. The Ag Coop patron may then receive an allocation of QBID from the cooperative.

The Qualified Business Income Deduction is scheduled to expire after 2025. Some taxpayers are considering recognizing higher business income while the deduction is available in order to maximize tax savings. The QBI deduction is higher when income is higher. Therefore, if business income is higher during 2018 though 2025, you’ll see higher QBID while it’s available and lower taxes overall. Save prepaid and depreciation deductions for after 2025 when possible.

Your QBID may be lower than 20% of the Qualified Business Income. This is because QBID is limited by your Taxable Income. Also, losses from 2018 business activity may reduce this year’s QBID. 

Deferred Crop Insurance Proceeds

Many areas in the United States saw some dramatic weather conditions in 2019. In some situations, crop insurance proceeds received during 2019 can be deferred to 2020. In order to defer the income, farms must show that the income from the crop normally would have been reported in the year following the year the damage occurred. 

Depreciation

The maximum Section 179 deduction is still $1M and bonus depreciation is still 100%. This means you can deduct the entire cost of qualifying property in the year the asset is placed in service. You can elect to deduct the cost of the asset over time if you do not want to deduct the entire cost in year one. 

S Election

Many businesses organized as C Corporations are considering electing to become S Corporations. This is due to possible lower tax rates, reduction of double-taxation and the ability to use the Qualified Business Income Deduction. Many factors would need to be considered such as future goals, operations, current tax balances, asset values/basis and financial forecast. A detailed analysis would be necessary to determine if this is the best option for your business. 

Individual Mandate Penalty

There will be no shared responsibility payment or penalty associated with not having individual health insurance on 2019 tax returns. Previously, filers who could afford health insurance but chose not to buy it were charged a fee under the Affordable Care Act. Starting with the 2019 tax year, this penalty is no longer enforced. 

Standard Deduction

The standard deduction for Single and Married Filing Separately increased to $12,200 in 2019.

The standard deduction for Married Filing Jointly and Qualified Widow(er) increased to $24,400.

The standard deduction for Head of Household increased to $18,350 in 2019. 

Income Tax Rates

Income tax rates were adjusted for inflation. The new tax brackets are as follows. These rates impact your personal return and all business income flowing through to your personal return such as partnership, S Corporation and sole proprietor income.

RATE

SINGLE

MARRIED FILING JOINTLY

HEAD OF HOUSEHOLD

10%

$0 - $9,700

$0 - $19,400

$0 - $13,850

12%

$9,700 - $39,475

$19,400 - $78,950

$13,850 - $52,850

22%

$39,475 - $84,200

$78,950 - $168,400

$52,850 - $84,200

24%

$84,200 - $160,725

$168,400 - $321,450

$84,200 - $160,700

32%

$160,725 - $204,100

$321,450 - $408,200

$160,700 - $204,100

35%

$204,100 - $510,300

$408,200 - $612,350

$204,100 - $510,300

37%

More than $510,300

More than $612,350

More than $510,300

 

With all the changes occurring to the federal and state tax laws, it’s important to work with a tax advisor who is well educated in Agriculture Tax Law. Contact the AgriSolutions Tax department at taxes@agrisolutions.com for more information. 

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Disclaimer – Descriptions provided in this article are presented as generalities. There are many factors not listed above which may impact your return. This article should not be considered legal or tax advice. For advice on a specific transaction, please contact the AgriSolutions Tax Department at taxes@agrisolutions.com.

Written By

Mary-Karen Wittman

Mary-Karen Wittman

Senior Tax Manager

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