AGRICULTURAL TAX. i n c o m e t a x e s

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1 AGRICULTURAL TAX ISSUES c r i t i c a l i n f o r m a t i o n t o k n o w f o r i n c o m e t a x e s

2 The difference between death and taxes is death doesn t get worse every time Congress meets. -- Will Rogers

3 QUALIFIED BUSINESS INCOME DEDUCTION (QBID) A new deduction for qualifying businesses

4 QUALIFIED BUSINESS INCOME (QBI) ~ The Tax Cuts and Jobs Act {TCJA} enacted I.R.C. 199A which applies to sole proprietors, partnerships, trusts and S corporations. It is designed in part to offset the cooperative advantage. ~ Does NOT apply to C corporations (they have a 21% flat rate). ~ Section 199A allows a deduction of up to 20% on qualified business income.

5 QUALIFIED BUSINESS INCOME ~ QBI offsets income tax liability and alternative minimum tax (AMT). It will not reduce selfemployment. Taken off of adjusted gross income (AGI). ~ Generally the net amount with respect to the qualifying trade or business of taxpayer. ~ There are income limits (explained next).

6 QUALIFIED BUSINESS INCOME ~ QBI limits for 2018: - under $157,500 or $315,000 MFJ no limit - over $207,500 or $415,000 MFJ no QBI - in between those two will have a phase-in or adjusted amount

7 QUALIFIED BUSINESS INCOME ~ QBI does not include: - W-2 wages for services - capital gains and losses - interest not due to a trade or business - Section 1231 gains - dividends and annuities

8 QUALIFIED BUSINESS INCOME ~ QBI does include: - cash and share rents - conservation reserve program (CRP) - hedging - W-2 wages if not service related or above the threshold amount

9 QUALIFIED BUSINESS INCOME ~ Experts says QBI will not include for farmers: - farm house rental income - trucking business outside of own farm - value-added business (direct marketing beef, fee hunting) - outside business of spouse (bed & breakfast) - custom work if large part of business (IRS will clarify this later)

10 QUALIFIED BUSINESS INCOME ~ QBI W-2 service wages where limits in place: - law - health - accounting - performing arts - consulting - athletics - financial services - performing arts - any business where principal asset is reputation or skill of individual

11 QUALIFIED BUSINESS INCOME ~ Additional QBI issues are: - taxpayer/preparer determines the qualified business within the rules - will need to determine total W-2 wages, allocation of W-2 wages to each business and allocate that to QBI. - tax preparers will have software to help calculate the QBI deduction.

12 2018 DROUGHT IN MISSOURI Reviewing the Tax Provisions that Impact Your Clients

13 BREEDING LIVESTOCK RULES ~ This is handled as an involuntary conversion if sold on account of weather conditions. ~ Rules for livestock held for breeding, draft and dairy purposes are covered in I.R.C. 1033(e). ~ Sporting livestock (horses) and poultry are specifically excluded.

14 BREEDING LIVESTOCK RULES ~ Gain can be postponed 2 or 4 years depending on federal disaster status. 4-years based on 1 st year after drought-free year. ~ 102 counties in Missouri, qualify for the 4 years as of now. Others would be 2 years. ~ The list of counties is at the end of your materials. It is also online at IRS Notice

15 BREEDING LIVESTOCK RULES ~ Only those animals above a producer s normal breeding sales can be postponed. ~ Must be replaced with like kind beef for beef, dairy for dairy. Bred heifers are fine. ~ There is no taxpayer qualification to qualify for this.

16 BREEDING LIVESTOCK ~ There is an example in your materials. We will go over it now. ~ A statement must accompany the return that states: ~ weather event that caused this ~ a computation on gain realized ~ number and kind exchanged in this year ~ number and kind sold under normal year (practice)

17 NON-BREEDING LIVESTOCK ~ Non-breeding livestock have different rules. ~ Applies to cash basis taxpayers only. Must qualify as a farmer under I.R.C. 6420(c)(3) ~ Allows for a one-year deferral of excessive sales.

18 NON-BREEDING LIVESTOCK ~ Weather-related sales must have caused sales. Sales can occur outside of federally designated area and designated time. ~ Must prove normal sales vs. this year s sale. ALL livestock qualify (poultry included). ~ Let s look at a couple of examples:

19 CROP DEFERRAL RULES ~ Crops have a little different rules also for cash taxpayers that receive payments in disaster year. ~ Crop income can be deferred to the following year assuming it is the producer s normal business practice. ~ Income here would include disaster payments and crop insurance.

20 CROP DEFERRAL RULES ~ Is an election on a crop by crop basis (so can elect beans, not corn). ~ So a producer that normally sells beans the year after harvest could postpone crop insurance payment as long as is normal practice. ~ Must prove normal practice.

21 OTHER DROUGHT EXPENSES ~ Expenses cause by drought are eligible business expenses assuming: - active farmer under soil and water conservation expenses (rural water, water lines, etc.) - hauling water, purchasing silage, etc. - as long as due to drought and active farmer, can deduct expenses

22 DROUGHT INCOME ISSUES ~ Remember disaster payments not subject to Missouri state income tax! ~ Includes livestock and crop if disaster related. Revenue payments not eligible! ~ Livestock Forage Program (LFP) would qualify here. Still must pay federal taxes.

23 FARM LOSS DEDUCTION LIMITS Changes Made Under the Tax Jobs and Cuts Act (TCJA)

24 FARM LOSS DEDUCTION LIMITS ~ Pre-2018 rules had special limits that applied to taxpayers who received applicable subsidies from the government. ~ If received a subsidy, any excess farm losses for that year carried forward to the next year. Did not apply to S corps. ~ Direct, countercyclical and CCC loans were applicable subsidies.

25 FARM LOSS DEDUCTION LIMITS ~ For tax years the new law disallows excess business losses for any non-corporate taxpayers, farmers included. ~ Definition of excess business loss is expanded to include excess of aggregate deductions from all trade or businesses of taxpayer plus - payers aggregate income & gain of all businesses for tax year - $250,000 ($500,000 for MFJ)

26 Practitioner Note Impact of this limitation p. 291 Limits the amount of nonbusiness income that can be offset by business losses. Creates an NOL where there would be none ~ impacts SE tax. Carry over reduced SE where NOL will not. Little or no nonbusiness income? ~ The loss becomes an NOL under prior rules

27 Farm Net Operating Losses under TCJA pp year carryback for farm losses eliminated 2-year carryback for nonfarm losses eliminated Carryover loss deduction limited to 80% of taxable income Unlimited years carryforward Farmers may elect out of 2-year carryback

28 Joe Koenen (660)