The new tax law offers significant benefits and relatively low setbacks for the majority of U.S. farmers, says Paul Neiffer, a CPA with CliftonLarsonAllen. Now, farmers are digging through the details to understand how the changes will impact them. Here are a couple questions from readers and Neiffer’s responses.
Is 50% bonus depreciation still an option for 2017 returns?
For assets acquired and placed in service after Sept. 27, 2017, 100% bonus depreciation applies. This is for all farm assets other than land, whether new or used. There is a special election that allows taxpayers to elect the old 50% bonus depreciation for the first tax year ending after this date.
Under old tax laws, you could elect out of 50% bonus depreciation on a depreciable-by-depreciable life basis. For example, a farmer could have five-, seven-, 10- and 15-year property. He or she could elect out of 50% bonus on the five- and seven-year property and keep 50% bonus on 10- and 15-year property.
The special election out of 100% bonus and into 50% bonus on those assets acquired after Sept. 27, 2017, is an all-or-none election. You can take 100% bonus depreciation under the old law (elect out on selected lives) or 50% on all assets.
Here are some possible scenarios:
In 2017, assume Farmer Jones purchases a new tractor for $300,000 on March 1 , a new combine for $500,000 on Nov. 1 and installs new tile for $100,000 in June and another round for $100,000 in November. He could use bonus depreciation as follows:
- Take 50% bonus on the tractor and $100,000 of June 2017 tile.
- Take 100% bonus on the combine and $100,000 of November 2017 tile.
- Elect out of 50% or 100% bonus on the tractor and combine (these are the same depreciable lives for at least until Dec. 31, 2017).
- Elect out of 50% or 100% bonus on the tile (both June and November).
- Elect out of 50% bonus on either the tractor or June tile and elect out of 100% bonus on combine and November tile by taking 50% on each (required to take 50% on each asset.
To make the election, simply attach a statement to the tax return indicating you’re making the election.
Can you explain like-kind exchanges and unadjusted basis?
With the new Section 199A, 20% of net farm income deduction is limited if your taxable income exceeds a threshold amount ($415,000 MFJ and $207,500 for all others).
The limit is the greater of 50% of wages paid by the farm or 25% of wages plus 2.5% of unadjusted basis of qualified assets.
Wages are essentially box 5 Medicare wages on form W-3 (commodity wages do not qualify) and qualified assets are any assets acquired in the past 10 years plus any assets older than 10 years still being depreciated (land improvements and buildings).
Here is an example:
Farmer Wallace has net farm income of $500,000. Wages paid are $100,000 and qualified property is $2 million. His limit is either the greater of $50,000 ($100,000 times 50%), or $75,000 ($100,000 times 25% plus $2 million times 2.5).
Therefore, his maximum Section 199A deduction is $75,000 (it might be then limited to 20% of taxable income minus capital gains).
What if the qualified property was acquired in a Section 1031 exchange, you ask. In that case, what is the unadjusted basis of that property? Right now, we don’t know. It can either be the cost of the new replacement property; it could be the cost of the replacement property minus the rollover gain, or even some other number.
In our example, let’s assume the qualified property is a building that was fully depreciated and then rolled over into a new building costing $2 million. If unadjusted basis is equal to replacement value minus gain, our new unadjusted basis becomes zero ($2 million cost of new building minus the $2 million gain rolled over). This drops our maximum Section 199A deduction to $50,000 instead of $75,000.
The Internal Revenue Service (IRS) knows they need to provide guidance on this matter (the code even instructed the IRS to provide guidance). Once we have that, we will provide an update. Until then, we just simply don’t know.
Want to make sense of the new tax law and its impact on your farm? Paul Neiffer offers the answers you need on his blog, “The Farm CPA.” Check it out at AgWeb.com/blogs.