Agricultural and Natural Resource Issues Chapter 9 pp National Income Tax Workbook

Transcription

1 Agricultural and Natural Resource Issues Chapter 9 pp National Income Tax Workbook

2 Agricultural and Natural Resources Issues Barry Ward, Davis Marrison, and Chris Bruynis

3 Ag Economy Update NIB 1. Farm Economy continues to be weak 2. Farm commodity crop payments lower in 2018 (or zero). 3. Chinese tariffs one cause of weaker crop prices - soybeans 4. New Farm Bill legislation being debated 5. Market facilitation program

4 It does not matter how slowly you go as long as you do not stop. Confucious

5

6

7

8

9 Market Facilitation Program (MFP) Soybeans $1.65 per bushel. Corn 1 cent per bushel. Dairy 12 cents per hundred weight. Pork $8 per head. Wheat 14 cents per bushel.

10 Chapter 9: Agricultural and Natural Resources Issues Issue 1: Issue 2: Issue 3: Issue 4: Issue 5: Others: Farm Loss Deduction Limits Depreciation of Farm Assets Farm and Ranch Tax Elections Farm Lease Income and the QBI Deduction Section 199A and Agricultural and Horticultural Cooperatives Charitable giving gifting commodities

11 Chapter 9: Learning Objectives Understand how new loss limitations apply to farm and nonfarm losses Depreciate farm vehicles and other assets Explain how the new like-kind exchange rules impact an equipment trade-in Apply the general rules that are applicable to making and revoking farm and ranch tax elections Discuss how the QBI deduction applies to farm rental income Calculate the QBI deduction for a patron of an agricultural or horticultural cooperative

12 Issue 1: Farm Loss Deduction Limits Pages

13 Farm Loss Limit prior to TCJA pp Rule applied only if receiving applicable subsidy Threshold was the greater of: $150,000 ($300,000 MFJ) The excess of aggregate net farm income of 5 preceding years If farmer had non-business income exceeding the threshold then the excess loss was carried over as Schedule F deduction (affecting ordinary and SE tax) loss over non-business income was a NOL

14 New Rules under TCJA pp Loss limit applies to all noncorporate businesses Applies to S corp shareholders too! No subsidy received requirement all businesses now subject Revised threshold amount $250,000 ($500,000 MFJ) No 5 year net income lookback option Anything over this threshold is a NOL

15 Ex. 9.2 David Stump p. 290 Single taxpayer Sch. C loss $248,000, Sch. F loss $22,000 Aggregate business loss $270,000 Loss deduction limited to $250,000 (assuming wage income) Excess loss ($20,000) is part of NOL (Ex. 9.3) Self Employment Tax unaffected by NOL

16 Ex. 9.4 Flow-through Loss Limitation p. 290 Applies at owner level Owner combines flow-through items with other individual items (Ex. 9.4) David Stump Sole proprietor Sch C loss (248,000) Sole proprietor Sch F loss (22,000) Saw-You-Coming K-1 gain 9,000 Overall Loss (261,000) Loss Limitation 250,000 Carryover as part of NOL 11,000

17 At-Risk and Passive Activity Loss (PAL) Limits pp Rules unchanged by TCJA Applied to each of the taxpayer s losses before applying the TCJA overall loss limitation First, at-risk Then, PAL Disallowed losses carryover

18 Example: 9.5 PAL Limits p. 291 Sam Adams Farm operation (active) ($242,000) Winery (passive) ($87,000) Flower shop (passive) $44,000 Total net income ($285,000)

19 Example: 9.5 (continued) p. 291 Sam Adams Actual As Limited Farm operation (active) ($242,000) ($242,000) Winery ($87,000) ($44,000) (passive) limited Flower shop (passive) $44,000 $44,000 Total net income ($285,000) ($242,000)

20 Practitioner Note Impact of this limitation p. 291 The new Loss Limitation limits the amount of nonbusiness income that can be offset by business losses Creates an NOL where there would be none Little or no nonbusiness income? The business loss becomes a NOL

21 Farm Net Operating Losses under TCJA 5-year carryback for farm losses eliminated 2-year carryback for nonfarm losses eliminated Farms still have this option Carryover loss deduction limited to 80% Unlimited carryover - years Farmers may elect out of 2-year carry back pp

22 Ex. 9.6 Surprise for Denise p. 292 $382,000 farm loss limited by TCJA Pay tax on the $166k $132,000 NOL carryover (or back?) ($382K - $250K)

23 Ex. 9.7 Denise w/o Wages p. 292

24 What do accountants suffer from that ordinary people don t? Pages

25 Issue 2: Depreciation of Farm Assets Pages

26 Issue 2: Depreciation of Farm Assets pp year MACRS for new farm equipment and machinery Used farm equipment remains as 7-year Farm use is defined by IRC 263A Incidental processing okay Not custom operator Not reseller ADS life continues at 10 years for all Grain bins and fences continue as 7-year MACRS

27 Depreciation Method p. 293 New Methods: 200% DB for farm assets in the 3, 5, 7 and 10-Year MACRS classes (or 150% DB if desired) Note trees and vines are 10 year property previously SL, now 150% DB 15 and 20 year property continue at 150% DB

28 Ex. 9.9 Difference a Year Makes p. 294 New combine purchase $430,000 W/out bonus or sec $46,071 depreciation ($430,000/7 x ½ Yr x 150%) 2018 $86,000 depreciation ($430,000/5 x ½ Yr x 200%) $39,929 more than 2017

29 Vehicle Depreciation pp IRC 280F limits apply to passenger vehicles Definitions unchanged by TCJA Limits increased - $10,000 in Year 1

30 Ex Problem with Bonus p. 296 Honey Hamm took 100% bonus on her 75% business use pickup ($32,000 x 75% = $24,000) New Bonus limit on passenger vehicles - $18,000 Deduction limited to $13,500 ($18,000 x 75%) $10,500 disallowed ($24K - $13.5K) will be recovered starting in Year 7 ($5,760)

31 Ex Remedies p. 296 Technical correction could allow 50% bonus depreciation in such cases Honey could elect out of bonus Would affect all 5-year property New farm equipment is now 5-year

32 Section 179 on SUVs p. 297 Unchanged by TCJA Definition of SUV Maximum Sec. 179 still in place Now the $25,000 maximum is indexed for inflation in $100 increments Bonus may be claimed and is not limited

33 No Like Kind Exchange for Personal Property pp only applies to real property under the TCJA Equipment trade-ins are now taxable events Most likely result will be taxable gain Offset is increased basis for depreciation

34 Ex Farm Tractor Trade-in pp List price of new tractor - $397,000 Trade-in allowance - $112,000 Cash price - $285,000 Adj tax basis of trade $61,262 (250, ,738) Reportable ordinary gain $50,738 (112,000-61,262) See Fig. 9.8

35 Ex Tax Planning p. 300 Recognized gain could likely be offset by depreciation Amos can Sec. 179 because he s under the $2.5 million investment limit Bonus is class by class (too much?) Depreciation reduces SE tax Equipment gain is not SE income

36 Fig. 9.9 Sec. 179 or Bonus p. 302 Numerous limits on Sec. 179 Bonus is class by class Bonus unavailable to some taxpayers based on other tax elections Bonus automatically applies (v. 179 election)

37 Ex Specific Dollar Amount of Depreciation $300,000 net cash income Sch. F goal of $10,000 Depreciation on prior assets - $120,000 Needs $170,000 of depreciation from $220,000 of current year purchases Bonus won t work all 5 year property p. 303

38 Ex Specific Dollar Amount of Depreciation continued p. 303 Section 179 of $157,500 Leaves $62,500 for MACRS $62,500 / 5 x 0.5 x 200% = 12,500 Net Cash Income $300,000 Old Depreciation -$120,000 Section 179 -$157,500 New Depreciation -$12,500 Schedule F NFI $10,000

39 Issue 3: Farm/Ranch Tax Elections Pages

40 Issue 3: Farm/Ranch Tax Elections p. 305 General Rules for Making Election: Some made by default Some have to elect on return Some are separate election See Figure 9.10 for guidance (pp )

41 Issue 4: Farm Lease Income & QBI Pages

42 Farm Lease Income and QBI Deduction p.316 Qualified business income (QBI) Qualified items of income, gain, loss, deduction from T or B T or B defined w/ reference to I.R.C. 162 Look to case law Commissioner v. Groetzinger Involved w/ continuity and regularity Primary purpose is income/profit - intent

43 Rental Income pp Farm rental income qualified for QBI deduction if conducted regularly and for income/profit May be QBI even if not subject to SE tax passive activity

44 Cash Lease p. 317 Cash lease tenant pays cash for acreage. Usually no material participation and not subject to SE tax. (see requirements for participation). Is eligible for QBI deduction if Trade or Business.

45 Material Participation p. 317 Cash lease subject to SE tax if landlord (LLC) materially participates Material participation if: Landlord furnishes most tools/equipment Landlord advances $ or has financial responsibility

46 Participation Tests p. 317 Tests for material participation (3 of 4) 1. Pay half costs, furnish half tools, advise or consult, inspect (3 out of 4) 2. Regular/frequent management decisions 3. LL works 100 hours or more over period that is 5 weeks or more 4. Activities that show material and significant involvement

47 New IRC Section 199A Deduction for Qualified Business Income (QBI) Landlords: Crop share landlords filing a Schedule F are eligible Cash rent landlords filing a Schedule E likely won t be eligible pending final regs (although there is some disagreement) Crop share landlords filing Form 4835 may qualify (if they are materially participating they likely will) Landlords will likely have to pass as a trade or business according to IRC Section 162

48 What Do You Think? Landowner who completely turns over management of the land to an agent, such as a professional farm management company, and does not otherwise materially participate in the farming operation, does not have SE income from renting land for agricultural use but can still claim the QBI deduction if the purpose of the rental is income or profit. A triple net lease arrangement, where the tenant pays the taxes, insurance, and maintenance, may not give rise to material participation, and it may not qualify for the QBI deduction.

49 New IRC Section 199A Deduction for Qualified Business Income (QBI) Farms with Multiple Entities: Proposed regulations indicate that common ownership of business entities allows the farmer to combine the rent income with the farm income an advantage Section 1231 Capital Gain Income: Will not qualify as QBI if the gain is treated as a capital gain likely not good for dairy producers

50 Conservation Reserve Program Payments CRP payments quality for QBI if is a regular activity and for profit Subject to SE tax if actively engaged (unless receiving social security) 8 th Circuit not SE income So Outside 8 th Yes QBI, Inside 8 th No QBI? pp

51 Issue 5: 199A and Ag. & Horticultural Cooperatives Pages

52 Issue 5: 199A and Ag. & Horticultural Cooperatives TCJA repealed 199 (Domestic Production Activities Deduction) TCJA originally provided Specified Ag. or Hort. Cooperatives with a deduction that was 20% of gross. Sales to non-cooperatives were 20% of net. Known as the grain glitch Consolidated Appropriations Act (CCA) modifies deduction under 199A(g) to rather provide a deduction similar to DPAD. p. 319

53 Sales to Coops p. 323 QBI deduction for patron is 20% reduced by lesser of: 9% of QBI from T or B allocable to qualified coop payments, or 50% of allocated W-2 wages

54 Allocating the Deduction to Patrons p. 323 Allocate the coop s deduction to patrons based on value of business w/ coop Sales to coops may result in a net QBI Deduction: Greater than 20% if the farmer taxpayer pays no W2 wages and coop passes through all or a large portion of the allocable QBI Equal to 20% if farmer taxpayer pays enough W2 wages to fully limit their coop sales QBI deduction to 11% and the coop passes through all allocable QBI Less than 20% if farmer taxpayer pays enough W2 wages to fully limit their coop sales QBI to 11% and the coop passes through less than the allocable QBI

55 Ex QBI Deduction Coop Patron p. 324 No Wages Paid Pat sold grain through coop $230K PURPIM, $20K patronage dividend $200K expenses no wages $50K QBI Deduction is $10K (20%) reduced by lesser of $4,500 or $0.so $10K

56 Ex QBI Deduction Coop Patron p. 324 with additional Pass-Through Deduction Same facts as in 9.24 except Pat also got $2,500 deduction from coop QBI deduction is $12,500 ($10,000 + $2,500)

57 Ex QBI Deduction Coop Patron p. 324 with Wages Paid Same facts as in 9.24 except. Pat paid $25,000 W-2 wages QBI deduction is $5,500 ($10K reduced by lesser of $4,500 or $12,500)

58 Gifting farm commodities One possible method for farmers to contribute charitably is to gift commodities to the charitable organization escapes tax and avoids the limits due to new higher standard dedcutions

59 Agricultural and Natural Resources Issues