Tax Cuts and Jobs Act provides opportunity, challenges for producers
Worland – At the end of 2017, Americans were left optimistic at the passage of the Tax Cuts and Jobs Act, but the intricacies of the act and how they impact farmers and ranchers were largely ambiguous.
“There are changes for individuals, as well as for farmers and ranchers,” said Wendy Tejada, Enrolled Agenta of SBW & Associates, P.C., and accounting firm in Worland.
Tejada and Certified Public Accountant Gary Wantulok, also of SBW & Associates, P.C., overviewed changes in tax law as they relate to ag businesses during WESTI Ag Days on Feb. 15 in Worland.
Overview
With some big wins and other concerning factors, Tejada and Wantulok said that overall, producers should see some tax breaks moving forward.
“When we do the 2017 tax returns, we also plan ahead for 2018,” explained Tejada. “We can project what numbers will look like in 2018.”
As a result of the new deduction and tax cuts, Tejada said their clients will see savings on 2018’s tax returns.
“One client, for example, will save $14,000 as a result of these changes,” she said. “All things being equal – if this client’s income doesn’t go up or down – he will save that much. We are really excited about these changes.”
Corporation taxes
One major change for businesses relates to how they are taxed.
“C Corporations generally had a tax rate of 15 percent, but big companies, particularly in manufacturing areas, were paying higher rates of up to 35 percent,” explained Tejada. “Now, C Corporations will be taxed a flat rate of 21 percent. This will hurt those businesses that were paying only 15 percent before.”
However, for sole proprietorships, partnerships, Limited Liability Corporations (LLC) and S Corporations, a new deduction was introduced in the Tax Cuts and Jobs Act.
“The income from these businesses flows from the business to a personal tax returns, where the tax is actually paid,” explained Tejada. “Now, people can get up to a 20 percent deduction on their tax return right off the taxable income for that.”
The deduction is similar to a Domestic Production Activities Deduction (DPAD), which was eliminated.
“This is huge,” Tejada said. “There are some exclusions and not everyone can get this deduction, but I think a lot of farmers and ranchers will benefit from this new deduction.”
Exchanges
However, Wantulok explained not all aspects of the bill are positive.
“One area that may not be beneficial for a lot of farmers and ranchers is 1031 exchanges,” he said. “1031 exchanges won’t qualify as a tax-free event across the board anymore.”
Trading land for land will still qualify as a tax-free exchange, but Wantulok said equipment trade-ins will no longer be tax free.
“Whatever allowance is given by the dealer for a trade-in is subject to income tax now,” Tejada said. “It could be a better deal to keep old equipment when buying new.”
Wantulok added, “These numbers get big pretty big. People need to visit with their tax professionals prior to doing exchanges.”
Losses
Another change comes in net operating losses. Prior to the Tax Cuts and Jobs Act, the general rule was to carry back losses two years and forward for 20. For farming and ranching, the carryback was five years.
“That changes,” Wantulok said. “Farmers and ranchers can carry back only two years, and other small businesses will get no carryback.”
However, businesses can now carry losses forward indefinitely.
Additionally, net operating losses are limited to 80 percent of taxable income.
“Before we could take income down to zero, but that is no longer possible,” he said. “We can carry it forward forever, though.”
Depreciation
Another area where big changes are seen is in depreciation.
“Overall, I think the new depreciation rules make things a little more flexible for ag businesses and small businesses,” Wantulok explained.
“Section 179 allows businesses to deduct the full purchase price of qualifying equipment in the first year,” he said, explaining breeding livestock, farm equipment and single-purpose structures all qualify. “The only catch is, people can’t purchase more than $2.5 million or this deduction is limited.”
Another change is the deduction limit, which was increased to $2.5 million dollars, which is a welcome change.
“We use this a lot in agriculture,” Wantulok said, “and this is one tool we can use in our tax planning to help out.”
The write-off for qualified improvement property – which includes improvement to the interior portion of any non-residential property, not including enlargement, elevators or escalators or the interior structural framework of the building – was also reduced to 15 years.
“It used to be that the 15-year life of improvements could only be taken advantage of by retail or restaurants,” Tejeda said. “Commercial property used to be deducted over a 39-year life, so we’ve just doubled the amount that can be deducted each year.”
Farming and ranching equipment can now also be deducted over a five-year life, rather than a seven-year period prior to the Tax Cuts and Jobs Act.
Bonus depreciation
Tejada also sees opportunity in new bonus depreciation regulations.
“We’ve had bonus depreciation for a lot of years,” she said. “It started to help stimulate the economy.”
She continued, “The old rules said, to qualify for bonus depreciation, we had to buy a brand-new, never-been-used asset to immediately write off 50 percent of that purchase. We can also create a loss with that write-off.”
Now, 100 percent of the asset can be written off, and assets are not required to be brand new, but only new to the business.
“We can buy used equipment and get bonus depreciation,” Tejada explained. “Many accountants caution people against kicking the can down the road continuously, because we can create a problem down the road, but talk to a tax professional with concerns.”
Overall, Tejada emphasized, “There are a lot of opportunities with these changes.”
Saige Albert is managing editor of the Wyoming Livestock Roundup. Send comments on this article to saige@wylr.net.
