Most of the new tax law is beneficial to farmers. But, in certain situations, it can cost you money. Here are some parts of the new law that will specifically affect you. Make sure to review your situation with your tax adviser.
Net Operating Losses and Excess Business Losses. Where the tax law provided benefits to farmers, the new rules on net operating losses took them away. Under the old law, farmers could carry back unlimited losses five years. They could also make an election to carry back the loss two years or elect to carry it forward.
Under the law, that benefit is substantially curtailed. A farmer is now only allowed to carry back a loss two years (or may elect to carry it forward). Plus, the maximum loss that can be both deducted on a return and carried back is now limited to $250,000 ($500,000 for married couples) and in many cases it will be very difficult to even get that large of a loss carry back.
For example, Fred Jones has this income: wages of $100,000 from working at the local co-op; a Schedule F farm loss of $750,000; and interest, dividend and IRA income of $50,000. The new law only allows Fred to deduct $250,000 of the loss in the current year (we are not sure if wages will count as business income); therefore, the loss that can be carried back is limited to $100,000 with the remaining $500,000 carried
forward to 2019.
Trading in Farm Equipment. Under the old law, farmers could trade in farm machinery and not have it be taxable. The new law requires the farmer to treat the trade-in value as the “sales price” of the equipment and report a gain or loss. We are already hearing about some implement dealerships putting no value on the trade-in. This will likely not work if the farm return is audited. The fair market value of the equipment should be reported as the sales price even if the bill of sale shows no value.
Gain on selling farm equipment is not subject to self-employment tax. The value allocated to the trade-in is now eligible for 100% bonus depreciation or Section 179, which allows for self-employment income reduction. The wild card is state income tax law. Many states will continue to allow 1031 trades on farm equipment. Other states might not, which might result in higher state income taxes for those farmers.
Preproductive Costs for Plants. The old law required farmers with orchards or vineyards to capitalize all the costs associated with getting that crop to production. These costs could be capitalized for four years or more. Once the crop reached production, the farmer could deduct all of those costs over a decade.
Under the new law, if a farmer’s average revenues are less than $25 million, then all these costs are allowed to be fully expensed as incurred. The farmer can also elect to fully deduct the plants’ cost using 100% bonus depreciation.
The wild card is for those farmers who elected out of capitalizing costs under the old law. Many farmers made this election, which required them to use straight-line depreciation over longer lives and did not allow bonus depreciation on any farm assets.
Exchanging Farm Real Estate. The new law continues to allow farmers to exchange farm real estate. However, be aware of certain traps. Farmland that contains certain depreciable property such as tiling, grain bins or hog barns, must be exchanged for similar property. It does not need to be the same but must be what we call Section 1245 real property.
For example, Jerry Smith sells a quarter section. The land value is $1 million and grain bins on the site are worth $500,000. If Jerry purchases another quarter section worth $1.5 million that is only land, he has to report the grain bin sale for $500,000. However, if the quarter section has tile or grain bins, worth at least $500,000 there is no gain to report.
Read more analysis and insight on tax questions on Paul’s blog at Agweb.com/farm-cpa
Paul Neiffer is a tax principal with CliftonLarsonAllen and author of the blog, The Farm CPA. He recently purchased a 185-acre farm. Driving his cousin’s combine is his idea of a vacation.
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