Impact of Tax Reform on Farmers Tax and Accounting Department Fall 2018
Agenda Summary of Tax Reform Individual Business Tax Planning with Business Structure Important Items on a Farm Tax Return
Disclaimer The information included and discussed in this presentation is general in nature and should not be relied upon in providing tax advice without independent research and analysis. The IRS is still trying to decipher the tax reform. Current updates to information and analysis included and discussed in this presentation should be considered.
Summary of Individual Tax Reform 1040 Size and Schedules Tax Rates Standard Deduction Increase and Personal Exemption Suspension Overall Itemized Deduction Changes Estate Tax Exemption Increased; Step up in Basis is retained
Individual Changes 1040 Size & Schedules Reduced from two full pages to two half pages and new Schedules Schedule 1 is Adjustment to Income Schedule 2 is Taxes Schedule 3 is Nonrefundable Credits Schedule 4 is Taxes Schedule 5 is Payments
Schedule 1
Schedule 2
Schedule 3
Schedule 4
Schedule 5
Schedule 6
Tax Brackets for Married Filing Joint Income Range Pre-TCJA TCJA $1 to $19,050 10% 10% $19,051 to $77,400 15% 12% $77,401 to 156,150 25% 22% $156,151 to $165,000 28% 22% $165,001 to $237,950 28% 24% $237,951 tp $315,000 33% 24% $315,001 to $400,000 33% 32% $400,001 to $424,950 33% 35% $424,951 to $480,050 35% 35% $480,051 to $600,000 39.6% 35% Over $600,000 39.6% 37%
Standard Deduction 2017 2018 Married Filing Joint $12,600 $24,000 Single $6,300 $12,000 Head of Household $9,350 $18,000 Personal Exemptions are Suspended until Dec 31, 2025 Taxpayers 65 and older or blind are still eligible for additional amount
Overall Itemized Deductions Changes Aggregate of state and local income taxes and state and local property taxes is limited to $10,000 (Sunset 12/31/25) Mortgage interest paid on principal residence and second home is limited to indebtedness of up to $750,000. The interest deduction for non-improvement home equity loans is suspended (Sunset 12/31/25) Previously, charitable contributions could not exceed 50% of adjusted gross income. This limitation has been raised from 50% to 60% (Sunset 12/31/25) The itemized deduction for Personal Casualty and Theft loss is suspended (Sunset 12/31/25). Personal casualties occurring in federally declared disaster areas are still deductible 2% Misc. Expense on Schedule A is suspended (Sunset 12/31/25). Previously, deductions were allowed for tax preparation, unreimbursed employee expenses, hobby expenses, and investment expenses. These are no longer included as itemized deductions
Estate Tax Lifetime estate tax exemption is set at $10 million with inflation adjustments (Sunset 12/31/25). The inflation adjusted amount for 2018 is $11,180,000 per Individual NEED TO WATCH SPECIFIC STATE ESTATE TAX Step up in Basis remains for inherited property. This is the increase in basis one receives upon inheriting assets Tax Rate Retained 40%
Gift Tax Annual exclusion amount increased to $15,000 Lifetime exclusion amount increased to $10 million with inflation 2018 $11,180,000
Summary of Business Tax Reform 199A Qualified Business Income Deduction Like-Kind Exchange for Personal Property Depreciation Changes Business Interest Limitation NOL
199A Qualified Business Income Deduction New 20% Deduction Sole Proprietorship, Partnership, or S Corporation Generally 20% deduction of Qualified Business Income (QBI) from partnership, S Corporation, or sole proprietorship income QBI defined as net amount of income, gain, loss, deduction with respect to trade or business Excluding capital gains or losses, dividends, and interest income
199A Qualified Business Income Deduction Deduction is limited when taxable income is greater than $315,000 MFJ or $157,500 for Single Below-the-line deduction (taken after Adjusted Gross income is calculated) Business losses from this current year will affect the QBI calculation next year
199A Qualified Business Income Deduction Cooperatives may still calculate a deduction and pass it through to their patrons or retain it Farmer would still calculate their own 20% QBI deduction (with limitations) This is in ADDITION to the amount passed through from the Co-op s This pass through cannot reduce the farmers taxable income below zero
Like-Kind Exchange for Personal Property Only real property is eligible for a 1031 exchange; personal property is no longer eligible. A business can no longer trade in equipment and defer the gain; rather they will report the trade in allowance as a sale Example: Purchase Price of Combine was $350,000 Trade-in Value of Combine was $150,000 and will be recognized as sale proceeds Check written for $200,000 New Combine is recorded on the depreciation schedule for $350,000
Depreciation Changes Section 179 (direct write-off) is increased to $1.0 million and has a $2.5 million phase-out threshold for eligible purchases First year accelerated depreciation (Bonus depreciation) is increased to 100% on both new and used property. (Phase-out occurs after 12/31/22 until 12/31/25). This is an all-or-nothing election and applies to all assets within the same class life property 7 Year Property Class life (i.e. farm equipment) on assets used in farming with original use commencing with taxpayer changed to 5 years. Used equipment remains at 7 years The ability to use 200% MACRS method of depreciation on certain farm assets allows for a larger depreciation deduction in the early years
Business Interest Limitation If gross receipts are greater than $25 million, business interest may be limited for all entity types
Net Operating Losses Modifications Previously, a farmer had more choices for carryback years with no limitation to income Currently, options for Farm NOL include a two year carryback or indefinitely carried forward NOL s created in 2018 or later are limited to 80% of taxable income as a deduction
Tax Planning With Business Structure Sole Proprietor Partnership S Corp C Corp
Sole Proprietor Tax Planning Limited opportunities for fringe benefits (Section 105 Plan) Tax plan in low income years as well as high income years Acceleration or deferral of income/expenses Maximize tax brackets Utilize Standard deduction Utilize all eligible credits The increased standard deduction for a single taxpayer allows an increased reasonable amount paid to children.
Partnership Tax Planning Being aware of individual partners tax liability Most partner fringe benefits are not excludable from partners income Guaranteed payments vs draws
S Corporation Tax Planning Being aware of individual shareholder s tax liability Stockholder employees must receive reasonable compensation from the Corporation
C Corporation Tax Planning May deduct fringe benefits for owners Built-in Gains tax is still 5 years New Tax Rate of 21%
Important Items on a Farm Tax Return Differences between the DPAD and 199A Depreciation K-1 information on Part 2 of Schedule E Passive or Nonpassive Separately Stated Items Schedule F, Line 3a and 3b could be commodity sales
Disclaimer The information included and discussed in this presentation is general in nature and should not be relied upon in providing tax advice without independent research and analysis. The IRS is still trying to decipher the tax reform. Current updates to information and analysis included and discussed in this presentation should be considered.
THANK YOU September 2018