Farm Tax Issues- What Tax Reform Means for Farmers

Originally Published in Farm & Dairy- December 6, 2018.

By: David L. Marrison, Coshocton County Ag & NR Extension Educator- marrison.2@osu.edu

The goal of last year’s Tax Cuts and Jobs Act was to simplify taxes.  While simplifications were made, I would argue that farm taxes have become more difficult.  There have been major changes to equipment depreciation, like kind exchanges, and a brand new Qualified Business Income deduction. 

I know many tax preparers are pulling their hair out trying to get a handle on all these changes.  My advice to farmers is to make sure to communicate with your tax preparer before the end of the year to see how these changes may impact your 2018 taxes.

Today, I would like to provide a brief overview of the changes which farmers will want to have on their radar.

Depreciation- Tax reform made some significant changes to how farmers depreciate their farm business property.  First, the depreciation recovery period for new farm equipment and machinery placed into service after December 31, 2017 has been shortened from seven to five years.  However, used farm equipment, grain bins, and fences will keep their current depreciation life of 7 years. 

The method to calculate depreciation is also changing as any property used in a farming business and placed in service after Dec. 31, 2017, will now use the 200 percent declining balance method versus the 150-percent declining balance method. However, farmers can elect out of the use of the 200 percent method. 

For farmers wishing to accelerate depreciation, Section 179 and Bonus Depreciation are still options which can be used.  Bonus depreciation has been moved back up to 100% from 40% and the limits on Section 179 expensing has been increased to $1 million dollars for 2018.  Using these accelerated depreciation methods can be tricky so make sure your tax accountant helps you determine if they should be used or not.

Like-Kind Exchanges– Another wrinkle which will impact farmers is the elimination of the Section 1031 like-kind exchange for personal property like farm equipment.  It does still allow for a like-kind of exchange of real property such as land.

Previously the gains or losses realized on the trade-in of farm equipment was generally deferred.  Bottom line is that the elimination of the like-kind exchange treatment for equipment means that farmers who trade in a piece of equipment will most likely now have a reportable tax event.

We would recommend that farmers consult with their tax professional before they buy equipment as it could have tax implications.  Your tax accountant can help you analyze the purchase and may be able to offset the gain by using accelerated depreciation on the new piece of equipment. Definitely more paperwork. 

Qualified Business Deduction– Farmers will also need to talk to their accountant about the new Section 199A Deduction or Qualified Business Income Deduction.  This new deduction was added due to the reduction in taxes for C-Corporations.  Previously C-Corporations could be taxed at a rate up to 35%.  The tax reform legislation set a flat rate of 21% for all C-Corporations. 

The reduced flat rate was only for C-Corporations so legislators had to account for other business entities like Sole-Proprietorships, Partnerships, S Corporations, and LLCs who could have still been subject to a maximum tax rate of 37%.

This led to the development of the Qualified Business Income (QBI) Deduction. This deduction allows for a deduction of up to 20% of qualified business income.  There are a lot of moving parts and limitations to this deduction so again it is imperative to talk to your tax accountant.  This is an additional wrinkle for farmers who sell their milk or grain to cooperatives as it will trigger an additional calculation. 

There is also a lot of discussion whether farm rental income qualifies for QBI which could impact landlords and their tax returns.  All this is clear as mud to most tax preparers and we are waiting for guidance from the IRS.  Bottom line is that farm taxes will be harder not easier to file. 

Help– OSU Extension is helping farmers and tax preparers understand these new tax changes.  Local Extension offices are hosting educational seminars and we will also be offering tax webinars for your convenience.  We encourage you to check out the Ohio Ag Manager Website at http:ohioagmanager.osu.edu for updates on these events.  In addition, our team will be writing more in-depth articles about each of these changes.

Upcoming OSU Extension Sponsored Tax Updates:

2018 Ag and Natural Resources Income Tax Issues Webinar

Monday, December 17, 2018

9:00 a.m. – 3:00 p.m.

Webinar.   Can also be viewed at one of 6 regional sites: Auglaize, Clermont, Miami, Putnam, Wayne and Wyandot counties.

For tax professionals who represent farmers or for farmers looking for in-depth review of tax legislation changes.

Registration, which includes the workbook, is $150 if received or entered on-line by December 6. After December 6, registration is $200.

For more information contact Julie Strawser at 614-292-2433 or Strawser.35@osu.edu

Farmer & Farmland Owner Income Tax Webinar

Monday, January 7, 2019

10:00 – 12:00 noon

$35 per person

Register at go.osu.edu/FarmerTaxWebinar

For more information contact Julie Strawser at 614-292-2433 or Strawser.35@osu.edu

 Farm Tax Update:

Thursday, January 17, 2018 from 1:00 to 3:00 p.m.

Tuscarawas County Extension Office

Session is being held to help farmers understand the changes to farm taxes.

No registration fee.

Call 330-339-2337 for more information or to register

 

 

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