On December 22, 2017, the President signed the Tax Cuts and Jobs Act. This is the largest tax reform law in thirty years, one that will make fundamental changes in the way you, your family and your business calculate your federal income tax bill, and the amount of federal tax you will pay. There were many changes that impact agriculture business directly outlined below. Most of the changes impacting individuals will go into effect on your 2018 tax return and will last until your 2025 return. Most of the changes impacting C-corporations and other business are permanent. Below are some of the key items that may impact your personal returns and your business.
This is the largest tax reform law in thirty years.
Lower tax rates.
The Tax Cuts and Jobs Act reduced tax rates for many taxpayers, effective for the 2018 tax year. Additionally, many businesses, including those operated as pass-through, such as partnerships, may see their tax bills cut. Below are examples of the new rates for Married Filing Jointly taxpayers.
Capital Gains Rates and AMT.
The capital gains and dividends tax rates will remain at 0%, 15% and 20%. However, the rates will now be applied based on your income level instead of your tax bracket. Most taxpayers will not see a significant impact from this change. The Alternative minimum tax will apply to fewer individuals.
The Standard Deduction and Personal Exemptions.
The standard deduction will almost double from about $12,700 to $24,000. The personal exemptions have been repealed. This means the $4,040 you received for each person listed on your return including yourself, your spouse and your dependents will no longer be available.
The Child Tax Credit.
If you claim a dependent who is younger than 17, you may be eligible for a $2,000 child tax credit. This credit doubled from 2017. A new credit of $500 is now available for dependents who are ineligible for the child tax credit. This new credit also applies if you claim a dependent who is elderly or disabled. If the child tax credit results in a refund, you can receive up to $1,400 in cash back from the IRS.
NEW Pass-Through Income Deduction.
There is a new deduction for pass-through income. This deduction is equal to 20% of your business income. This is available for income from sole proprietors (schedule C or F income), S-corporations, partnerships, and LLCs. This is not available for investment related income. The deduction is limited to 50% of the wages paid by the business.
Section 529 and ABLE Plans.
Section 529 educational savings accounts can now be used for elementary or secondary public, private and religious school tuition. You can use $10,000 per student annually. There is no change to the use of 529 plans for college students. ABLE accounts are accounts for individuals with disabilities. In 2017 we could contribute $14,000 annually. Starting in 2018, we can contribute $14,000 plus an additional amount determined by your income.
There were numerous changes to itemized deductions. Miscellaneous itemized deductions are no longer available. These deductions include unreimbursed employee expenses, investment fees, hobby expenses, professional fees and safe deposit box fees. The mortgage interest deduction will be reduced if your home mortgage is more than $1 million. Interest on home equity loans is no longer deductible. The state and local income, sales and property tax deduction will be limited to $10,000. This does not apply to business related taxes. Theft and casualty losses will only be deductible for losses claimed from presidential declared disasters. Moving expenses incurred when changing jobs will not be deducible (excludes military). However, you may receive a larger deduction for medical expenses in 2017 and 2018. The charitable contribution limit will increase from 50% of your Adjusted Gross Income to 60%. We can include certain other costs in gambling losses versus only the wager cost as in the past.
Alimony payments will become nondeductible and alimony received will not be taxable.
The Healthcare penalty will be removed after 2018.
Estate and GST Exemptions.
The lifetime Estate and Generation Skipping Taxes will increase from about $5M to $11M per person. This means a married couple will have a lifetime estate tax exemption of about $22M.
Roth Conversions and Loans from IRAs.
IRA owners can no longer undo their conversions from traditional IRAs to Roth IRAs and recover the income tax paid on the switch. If a loan for your retirement plan is not paid timely, the open loan balance is treated as a distribution. The new law allows the owner to roll distribution into a new qualified retirement plan.
C-Corporation Tax Rate, AMT, Accounting Method and UNICAP.
There are also many changes for businesses. The C-corporation tax rate will change from a graduated tax rate ranging from 15% to 35% to a flat rate of 21%. The Alternative Minimum Tax will no longer apply to C-corporations. The cash method of accounting can be used for businesses with gross receipts less than $25M. Businesses with gross receipts less than $25M will not be required to capitalize inventory.
NEW Credit for Family and Medical Leave.
There is a new credit for Family and Medical Leave pay. If employees are paid 50% of their wages while on leave, the employer receives a 12.5% credit for the wages paid. This credit increases if the employer pays more than 50% of the employee’s wages.
The depreciation rules changed significantly. Under the new rules, 100% of certain assets will be deductible in the year they are placed in service. This includes certain new and used assets. The section 179 deduction increased from $510,00 to $1M. Farm property is now depreciated faster and farming assets previously depreciated in 7 years will be depreciated in 5 years.
Interest Expense and Dividend Received Deduction.
The interest expense deduction will be limited to 30% of Taxable Income. Farming business can elect out of this limitation. The Dividends Received Deduction was reduced from 80% to 65%.
Net Operating Losses.
Starting in 2018, the annual Net Operating Loss deduction will be limited to 80% of Taxable Income. There will be no carryback of losses to prior tax years. The carryforward will never expire. Farmers will have the ability to carryback losses 2 years. Farming losses incurred each year cannot exceed $500k for married filing jointly taxpayers.
Like-Kind exchanges can be used for only real property going forward. The new law excludes personal property such as machinery and equipment.
The Domestic Production Activities Deduction has been repealed. A new version of the DPAD may be available for agriculture co-ops only beginning in 2019.
Meals and Entertainment.
Expenses incurred for food are only 50% deductible from 2018 through 2025. This includes food and beverages paid to employees as de minims fringe benefits and food provided for the convenience of the employer. After 2025 food expenses will be nondeductible. At this time, the deduction for employee housing is not effected. Entertainment expenses are no longer deductible.
Reorganizations and Capital Contributions.
There were some changes made with regard to structures including revocation of the S-corporation election, C-corporation contributions and partnership ownership changes. Speak with your preparer before making these types of changes.
There were many other changes applicable to multinationals, charitable organizations, insurance companies, banks and large businesses not described above. Contact your preparer or the AgriSolutions Tax department if you would like to learn more about those changes.
Please contact the Agrisolutions Tax department to learn more about the tax law changes that may impact you and your business.
Disclaimer – Descriptions provided in this article are presented as generalities. There are many factors not listed above which may impact your business. This article should not be considered legal or tax advice. For advice on a specific transaction, please contact the AgriSolutions Tax Department at firstname.lastname@example.org.