WARNING - This Post is longer than Normal.
The Senate released details on their proposed changes to the income tax laws and there are several major changes proposed that would apply to farmers and many of these changes are major. First, I will list all of the changes that are clearly beneficial to farmers:
- Section 179 is increased to $1 million and will phase-out beginning at $2 million. This amount is indexed to inflation in $100,000 increments.
- If the taxpayer has gross receipts under $10 million, then the capitalization rules under Section 263A would not apply to such taxpayer. This would exempt capitalization of orchards and vineyards for taxpayers with revenues under this threshold
So far, that is the only major changes I found that are favorable to farmers. Here are the changes that might not be favorable to farmers:
- Repeal of the automatic deduction for fertilizer costs under Section 180,
- Repeal of the special method of accounting for farmers under Section 447,
- All businesses would be required to use the accrual method of accounting once their three average gross receipts exceed $10 million (indexed for inflation in $1 million increments). If the cash method of accounting is allowed, inventories can be immediately deducted (which may be a benefit and would offset the repeal of Section 180),
- Like-kind rules are eliminated, however, sales of equipment will only be taxable, if the amount received exceeds the cumulative "pool" amount of assets at the end of the year (we cover the pool provisions later in the post),
- Involuntary conversions would be subject to a two-year rollover period instead of more favorable four years or more,
- All depreciation recapture, including buildings, would be subject to ordinary income tax rates. I also believe that any sale of assets placed in a pool would be ordinary gain even if the sales price exceeded original cost,
- The maximum amount that can be depreciated for personal-use automobiles is $45,000 over 5 years,
- Percentage depletion is repealed,
- Half of advertising expenses are allowed in year one, remainder is amortized over 5 years,
- Amortization of most intangible assets are now over 20 years instead of 15 years
Depreciation changes are as follows:
You will no longer keep track of individual assets for income tax purposes (if you prepare GAAP financial statements and state income taxes, you may still be required to keep track of separate assets). All non-real estate assets will be placed into one of four pools. Each pool will start with the previous years ending total, add all new assets, subject any sales proceeds and the remaining pool amount will then be multiplied by the following percentage to arrive at the current year depreciation amount:
- Pool # 1 - 38%
- Pool # 2 - 18%
- Pool # 3 - 12%
- Pool # 4 - 5%
That depreciation amount will then be subtracted to arrive the beginning pool amount for the next year. Almost all farm personal property would be part of Pool #2. All land improvements would be part of Pool # 4 and it appears that all farm buildings would be treated as real estate and deducted on a straight-line basis over 43 years. This would include single purpose agricultural structures (currently on a 10 year life).
Bonus depreciation would no longer be available.
For most farmers, the benefit of having $1 million Section 179 should outweigh the costs of stretching out the lives of land improvements and farm buildings. However, for livestock intensive operations such as hog, dairy and poultry farmers, this may be a major negative.
As farming operations get larger, the $10 million gross receipts test will get harder and harder for farms to meet which may lead to the mandatory use of the accrual method of accounting. One benefit is that the current "farm" accrual method may be replaced with a "real" accrual method which would result in income only being realized as sales are made. The current farm accrual method requires income to be reported before an actual sale is made.
All-in-all, I believe there are more negative than positive changes in the proposed Senate bill. There is also a House bill floating around which has many proposed changes different from the Senate. It will be interesting to see what finally gets passed (if anything) and we will keep you posted.