CLINTON — Reform to 2017 taxes modifies credits and deductions and changes the bracket structure and percentages.
Farmers, like all other individuals and businesses, are playing the waiting game; it’s not certain how the birth of the Tax Cuts and Jobs Act (TCJA) will affect year-end taxes and agricultural business cycles.
“Passing tax reform would be a big win for Americans of every income level and walk of life,” Sen. Chuck Grassley, R-Iowa, wrote prior to the president’s signature. “The Tax Cuts and Jobs Act lowers rates, doubles the child tax credit and simplifies the filing process. It would help raise workers’ wages and bring back and create new jobs by making the United States more competitive with other countries. Tax reform will help rural America, much of which has been struggling economically for far too long.”
The Iowa Farm Bureau Federation has long sought a reworked tax code, seeking to address inequities such as estate tax and accelerated depreciation on investments in equipment. Grassley calls the estate tax unfair, as it can lead to the dissolving of family operations. This tax now has a doubled exemption, going from about $5.5 million to $11 million.
“Estate tax has been a burden to many families that want to pass the farm on to the next generation or their grandchildren,” said Iowa Farm Bureau Federation President Craig Hill. “They run into a very heavy tax. If their evaluation of their farm (was) above a certain level.”
Though the newest tax provisions don’t affect this tax season, Patrick Parker, of Winkel, Parker & Foster, CPA PC, strongly recommends consulting one’s tax adviser for understanding and ways to move forward in 2018.
Parker said that rate reductions are generally going to be at 3 percent, though personal exemptions may end up hurting some people. Counsel with tax preparers may shed light on areas farmers need to change going into 2018 taxes so they can decide what makes sense for their operation.
A potential positive at play is the Section 179 deduction, which has doubled to $1 million and phases out at $2.5 million in purchases. This allows for the purchase of machinery, like a combine or tractor, to be labeled as a business expense.
This section of the code allows farmers to deduct equipment purchased in the next year. Depreciation, as it is called, has decreased in the allotted years from 7 to 5 years.
“When the year does come around and you have a strong year, you have to renew your equipment and machinery,” Hill said. “Previously you were not able to deduct that, and now up to $1 million you can deduct that.”
“In the past they had to use 150 percent declining balance, and now they can use the maker’s double declining balance so they can write it off a little faster,” Parker said.
Farming is not always profitable, and pass-through allows farmers to carry those losses forward to offset income in future years. Net operating loss has also changed under TCJA. The rule was if you generated $10,000 loss, it could be applied to prior returns already filed. Farmers used to be be able to carry losses 5 years back; it has changed to two.
Replacing the domestic production activity deduction is a 20-percent 199A deduction of pass-through and self-employed income.
“That’s going to be a big deal,” Parker said.
A great number of farms in the United States are pass-through entities – farming income is subject to individual income tax rather than corporate. The TCJA puts limitations that may pose some difficulty.
Some farmers are going to be structured as a C corporation, where a break-even income would be $90,000 with a flat 21 percent, on all brackets.
“There’s some wins and some losses,” Parker said.
Hill called TCJA a “major overhaul” to which Congress is still ironing out the regulations and rules on how to enforce it.