This is not the year to skimp on end-of-year tax planning, as a smart move for one farmer may be a huge mistake for another. That’s thanks to the Tax Cuts and Jobs Act, which passed in December 2017.
“It has been over 30 years since we last saw major tax reform,” says Paul Neiffer, a CPA and principal at CliftonLarsonAllen and a Top Producer columnist. “Most of the new law’s changes are positive, but some will make tax planning more challenging.”
The new tax law combined with continued financial stress may tempt you to avoid tax planning—don’t give into the urge.
“Many times, I find producers who believe that in low-income years, tax planning is not important,” says Tina Barrett, executive director of farm accounting firm Nebraska Farm Business. “In reality, it is often more important.”
Call your tax advisor now, as he or she will need to spend extra time planning and preparing your return, says Kristine Tidgren, director of the Center for Agricultural Law and Taxation at Iowa State University. As a result, you should also budget for higher tax preparation expenses.
Neiffer, Barrett and Tidgren provide these year-end tax planning tips.
1. Plan on not filing by March 1.
Many farmers automatically file and pay their income tax return by March 1, Neiffer says. This method allows them not to have to make one estimated tax payment on Jan. 15. However, this year, it is likely much better to make your estimated tax payment on Jan. 15, and then file your income tax return on April 15.
“The IRS is still finalizing the new law and related tax forms, which will make it extremely difficult for tax preparers to complete returns by March 1,” he says. The required payment due on Jan. 15 is the lesser of: 100% of 2017 tax liability or two-thirds of this years expected liability.
2. Don’t show losses.
The new tax law only allows farmers to carry back their net operating losses two years or elect to carry it forward. The maximum loss a farmer can recognize is $250,000 single or $500,000 if married filing joint.
“We really do not want to create net operating losses,” Tidgren says. “The new loss rules make planning important for clients who are facing a year of loss.”
Generally, farmers won’t want to create a loss and there are several ways farmers can increase their taxable income, Neiffer adds.
“A good option is to elect out of bonus depreciation and then use Section 179 to reduce taxable income to the optimal amount,” he says.
3. Bring your trade in documents.
“In the past, we have not needed to worry about anything but the boot difference paid on a trade,” Barrett says. “However, another change from the TCJA is that we must ‘sell’ the old asset for the trade-in value and put the new asset on the depreciation schedule with the full fair market value (FMV).”
This can generate significant taxable income, so you will want to make sure you have planned on the recognition of this sale, she adds. For many operations that trade equipment regularly, this could be a significant amount of money.
4. Be ready to discuss Section 199A.
The new tax law brought into play Section 199A (commonly known as the 20% pass-through deduction).
“The original law allowed most farmers to take a 20% deduction of net farm income off of their taxable income,” Neiffer says. “However, farmers who sold their commodities to a cooperative could deduct 20% of their gross sales and the only limit was 100% of taxable income (after subtracting capital gain income).”
To calculate their Section 199A deduction, farmers will need to:
• Calculate net income or loss from each business.
• If total taxable income is under a threshold amount, then they simply multiply net business income by 20%. If this is less than 20% of taxable income (after subtracting capital gains), this is their Section 199A deduction.
• If their income is over the threshold amount ($207,500 or $415,000 for married couples), the deduction will be limited to the greater of 50% of wages paid by the farm or 25% of wages paid plus 2.5% of qualified depreciable property.
• If they sell products to a cooperative, they will need to reduce the Section 199A deduction by the lessor of 9% of net income attributable to those sales or 50% of wages paid.
“If this sounds complicated, the actual calculations are even worse,” Neiffer says. “For farmers who sell to cooperatives and their income is under the threshold amount, they likely would not want to pay wages. However, if they are over the threshold amount, not paying wages will reduce their regular Section 199A to simply being 2.5% of depreciable property.”
Undoubtably, Section 199A has received the most attention and generated the most questions for farmers in terms of the new tax law. Be cautious in making a major change to your business structure, especially if there is a significant cost associated with the change, Barrett adds.
“The 199A deduction is currently only in law until 2025, so weigh the short-term benefits with the long-term consequences,” she says.
When you meet with your tax preparer, take a breakdown of the grain you sold to a cooperative versus a private grain company, Barrett suggests.
5. Compare your inventory change.
Your CPA can help guide you to where your taxable income should be. To do so, they will review your inventory change, Barrett says.
“This allows us to see if you are pushing significantly more income into the next year or pulling more expenses from the next year into this year,” she says. “If your inventory change is significant, consider moving up a tax bracket in order to recognize more income.”
6. Review and prepare your records.
“I often see reports printed at 4 a.m. on the morning I meet with a producer and I know that the likelihood of information being dumped into the computer without another look is pretty good!” Barrett says. “No matter how current you stay on your bookwork, it’s important to review the information you put in there.”
Look at the detailed reports and make sure the information makes is accurate. For example, she says, principle payments need to be separated from interest and the principle should not be included in your expenses. “These types of errors can be costly if found after the first of the year,” she says.
Read more news and analysis about farm tax planning:
Tax Reform in a Nutshell
Quick Thoughts on the New Tax Law
The New Tax Bill And You