A smart move for one farmer may be a huge mistake for another—thanks to the new tax law, which passed last year. This is not the year to skimp on end-of-year tax planning, advises Paul Neiffer, a CPA and principal at CliftonLarsonAllen and a Top Producer columnist.
Additionally, you should budget for higher tax preparation expenses since your advisors will need to dedicate more time and resources to your planning and preparation, says Kristine Tidgren, director of the Center for Agricultural Law and Taxation at Iowa State University.
Neiffer and Tidgren suggest you ask your advisor these questions.
How will a net operating loss (NOL) affect my financial standing?
The new tax law only allows farmers to carry back their net operating losses two years or elect to carry it forward. The maximum loss a farmer can recognize is $250,000 single or $500,000 if married filing joint. “We really do not want to create net operating losses,” Tidgren says. “The new loss rules make planning important for clients who are facing a year of loss.”
Should I aggregate my businesses together to maximize the Section 199A deduction?
Farmers with incomes over $157,500 (single) or $315,000 (married), face additional limits on the Section 199A deduction. The final deduction by the IRS may be limited to 50% of W2 wages or 25% of W2 wages plus 2.5% of qualified property, Neiffer says.
“If a high-income farmer has income in one entity with no wages and no income in another entity with all of the wages, the farmer would have no deduction,” he says. “As long as the entities are under common ownership and there is a commonality to the aggregation (the land is being rented to the farm, the trucks are being used on the farm, etc.), the IRS will allow each owner that is part of the common group to aggregate their holdings into one ‘business.’”
Can I take the Section 199A deduction on rental income?
The latest word from the IRS does not qualify cash rent as business income, and the 20% Section 199A deduction is only for qualified business income. To qualify, the income must be tied together with a farm operation.
“In order to be tied together with a farm operation, we have to meet what is called a common group,” Neiffer says. “That's where at least 50% of the ownership in each is held by the same people. That doesn’t mean anybody has to own 50%, it just means you have to add it up to at least 50%. So, if you're not in that situation, there are certain things we can do to fix that. But once yearend goes past, we can't fix it.”
Is taking bonus depreciation the right move for me?
Through Dec. 31, 2022, 100% bonus depreciation applies to all purchases of farm property, including used property. Bonus depreciation is an extra tax deferral—not a deduction, Tidgren says. So, if you sell the asset, you have to pay income tax on that gain. Depending on your income and the type of asset, you may want to opt out of bonus depreciation.
Should I make an estimated tax payment on Jan. 15?
“A lot of farmers are conditioned to file the return by March 1,” Neiffer says. “But for farmers who have lower income tax the year before, I encourage them to make estimated tax payments on Jan. 15. The chance of CPAs to really to do a good return by March 1—especially for higher-end farmers—is somewhere between slim and none.”
Should I itemize my deductions?
The new tax law removed the deduction for personal exemptions. But the standard deduction was essentially doubled (up to $24,000 for married couples and $12,000 for singles). “If your itemized deductions don’t exceed $24,000, you won’t need to itemize,” Tidgren says. “But if you had taken a lot of itemized deductions in the past, talk to your advisor now; some things can be done to offset the damage.” Also, this change in itemized deductions may affect the best way for you to do charitable giving.
Would it be best to pay for large medical expenses in 2018?
If you’ve had a large medical expense this year or are paying for long-term care, look into taking the deduction in 2018, Tidgren says. The deduction changes in 2019, so you’ll receive a bigger deduction for those medical expenses if you pay those in 2018 versus 2019.
Read more news and analysis about farm tax planning:
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