Tax Breaks and Best Practices in Agriculture


February 13, 2020

Lisa Hastings presented on best practices and tax breaks for farmers.
Thursday, February 14 Lisa Hastings presented on best practices and tax breaks for farmers at the MidAtlantic Women in Agriculture Conference. 
 
THE FEDERAL TAX LAWS HAVE BEEN EVOLVING AND HAVE CHANGED SIGNIFICANTLY IN THE LAST FEW YEARS
  • 2017 Tax Cuts and Jobs Act was passed in December, 2017
  • Guidance and regulations continue to be issued even now
  • Farming operations, which are often capital-intensive, can benefit from many of the recent changes
 
FARMING OPERATIONS TAKE ON DIFFERENT FORMS
  • If incorporated, the business may pay income taxes (C corp), or the income may flow through to the owners and be taxed there (S corp)
  • Many farming operations are not incorporated, and so they are taxed on the owners’ personal return
  • Many farmers are also landlords to the operations, which has different tax implications and planning opportunities
 
 

TAX OPPORTUNITIES FOR FARM BUSINESSES

 

STRATEGIES FOR USING CASH METHOD TO MANAGING TAXABLE INCOME

  • Most farm businesses can take advantage of cash basis method for reporting taxable income
    • Ag exception for corporations, partnerships and individuals
    • Taxed on income received and expenses paid
    • In a good year, start looking early for opportunities to prepay expenses
      • Look for vendors that offer a discount for early payment
      • Consider the reliability of the vendor
  • Make sure to determine your target taxable income
    • Creating too many expenses can result in lower tax benefit
      • Income under ~ $40K single / $78K married is only taxed at 12%, so you could easily be taxed at a much higher rate later
    • May need to consider the effect on all the family / owners
    • Consult with your CPA regularly during the year, and to refine your strategy in Q4
 

STRATEGIES AROUND ACCELERATED AND BONUS DEPRECIATION

  • Bonus depreciation
    • 100% write off in year placed in service
      • Not the same as just writing the check
      • Available for assets in service even if financed
    • Is available for equipment and similar purchases
    • Not land and buildings
      • But be sure to segregate fixtures, etc. from buildings
      • Fixtures, etc. can be depreciated more quickly and may be eligible for bonus depreciation
    • Bonus depreciation is elected (or not) for all assets in the same class
      • i.e., all 5 year property, all 7 year property…
      • this is relevant for managing taxable income to a target
      • too much depreciation can provide a diminished return / lower tax benefit
  • IRC Section 179 depreciation
    • Similar to Bonus depreciation – 100% write off in year placed in service
    • Differences
      • Capped at $1M for businesses with up to $2.5M of assets placed in service in a year (indexed annually)
      • Related businesses are aggregated for consideration of total assets placed in service
      • Can be elected for individual assets
      • Can be useful in managing target taxable income
  • Depreciation is a tool to be managed, NOT a given
    • It’s important not to “overshoot” target taxable income
    • Consider the effect of depreciation compared to financing terms
      • If an asset is fully depreciated in year 1, expenses will not align with repayments in future years
    • If an asset is fully depreciated in year 1, could have to recognize gain if sold in a later year

 

QUALIFIED BUSINESS INCOME DEDUCTION (QBID)

  • New deduction under the TCJA starting in 2018
  • Generally creates an additional deduction = 20% of ordinary income
    • Limitations can apply if income exceeds $315K
  • Deductible by S corps, partnerships and individuals
  • Applies to active agricultural operations
  • Factors into managing target taxable income as mentioned previously
  • May apply to rental activities
    • Rental activities are considered passive, and most were not historically considered a trade or business
      • Most rental activities also did not have to file forms 1099
    • IRS issued new guidance in 2019 that, if the rental activity could be considered a trade or business, then it could qualify for the QBID
      • If it is considered a trade or business, then it must consider whether forms 1099 are needed for unincorporated vendors paid >$600 during the year
      • Penalties for not filing 1099s are significant – $50 to $550 per form not filed
    • Consideration of trade or business is based on the situation
      • whether owner actively manages the property vs pays a property management company, for example
    • If you have not had this conversation with your CPA yet, do it ASAP
 

INDIVIDUAL TAX PLANNING STRATEGIES UNDER TCJA

 

STANDARD VS ITEMIZED DEDUCTIONS

  • This is the largest single change to individual returns outside of the business provisions
  • Majority of individuals now utilize standard deduction
  • Itemized deductions now comprised of very few items
    • Medical expenses, but only if more than 7.5% of your income
    • State income and property taxes, but capped at $10K
    • Home mortgage interest, now capped at $750K of debt
    • Charitable deductions
  • Charitable donations are likely the only discretionary item
  • Strategies for maximizing charitable contributions / itemized deductions
    • “Bundle” charitable giving into alternate years, taking standard deduction in the other years
    • Consider a donor-advised charitable fund, and use the fund as a tool in managing your target taxable income
    • Consider donating appreciated assets
    • Consider donating from your IRA
 

NEW – SETTING EVERY COMMUNITY UP FOR RETIREMENT ENHANCEMENT ACT OF 2019 (SECURE ACT)

  • Passed in December, 2019 (heavy sigh…)
  • Most provisions effective for 2020 and future years
  • New provisions around Employer-sponsored retirement plans
    • New $500 Credits for Small Employer Startup and Automatic Enrollment
      • available for 3 years to offset new plan startup costs and startup or conversion costs of plans allowing automatic enrollment
  • Allows long-term (at least 3 years), part-time workers who work more than 500 hours per year to participate in employer-sponsored retirement plans
    • Previous rules was that employees had to work more than 1000 hours in a year to be eligible
  • Allows late adoption of a new plan – up to the extended due date of the plan sponsor’s tax return filing
  • New provisions affecting individuals
    • Individuals may continue to contribute to IRAs after age 70 ½
    • Required minimum distribution (RMD) age increased from 70 ½ to 72
  • Allows penalty-free withdrawal up to $5,000 for birth or adoption of a child
    • Each parent can withdraw up to $5K within 1 year of birth or adoption
  • IRC Sec 529 plans have been expanded to allow distributions for
    • Registered apprenticeship programs – fees, books, supplies and equipment
    • Qualified education loan repayments up to $10,000
  • Effective for distributions after 2018
    • Changes in RMD distributions to designated beneficiaries
      • Previously beneficiaries were generally allowed to stretch IRA distributions over the beneficiary’s life / life expectancy
  • New rule for non-spouse beneficiaries – the entire interest must now (generally) be distributed within 10 years after the death of the IRA owner
    • A few exceptions still exist
    • This rule change can make a big impact on previous estate planning
    • Consult with your CPA &/or attorney
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