Changes to the new tax law could cause financial headaches this spring for unaware farmers.
“It’s going to create what I call ugly tax returns,” says Paul Neiffer, a tax accountant with CliftonLarsonAllen and author of The Farm CPA on Farm Journal’s Agweb.com. “We’re going to have all these gains over on form 4797—the ordinary gain from selling or trading in property. So that’s going to create some issues.”
The new law requires farmers to treat the trade-in value as the sales price of the equipment and report a gain or loss. Under the old law, farmers could trade in farm machinery and it was not taxable.
“We are already hearing about some implement dealerships putting no value on the trade-in,” Neiffer says. “This won’t likely work if the farm return is audited. Report the fair market value as the sale price, even if the bill of sale shows no value.”
Gain on selling farm equipment is not subject to self-employment tax, he adds. The value allocated to the trade-in is now eligible for 100% bonus depreciation or Section 179, which allows for self-employment income reduction.
Neiffer says the wild card is state income tax law. Many states will continue to allow 1031 trades on farm equipment, while others won’t, which might increase your state income taxes.
Another potential complication from the new tax law affects social security earnings. Farmers typically want some, but that’s on schedule F and no longer available. “They’re going to have to use what’s called the optional self-employment method, and that gets you four quarters to get your $5,280 of earnings,” he says.
The new law continues to let farmers 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 doesn’t have to be the same but it must be what’s called Section 1245 real property.
For farmers considering retirement, there’s good news on estate taxes. Farmers have a lifetime exemption amount of $11.4 million for 2019. Neiffer says this means most farm couples can be worth around $30 million and owe no federal estate taxes with minimal planning (beware of state estate taxes). But, if a new administration is voted into office in 2020, it could reduce that exemption amount back to previous levels.