How the New Tax Cuts and Jobs Act Affects Your Tax Planning

There are two or three important benefits that the Tax Cuts and Jobs Act (TCJA), signed into law December 2017, offers farmers in the 2018 calendar year.

By

Julie Spiegel

Published on December 7, 2018

There are two or three important benefits that the Tax Cuts and Jobs Act (TCJA), signed into law December 2017, offers farmers in the 2018 calendar year. Let's take a look at those, as well as a few things to watch out for, or at least be aware of, as you head into tax season on your farming operation.

Income tax brackets are wider and tax rates are lower

As an example, a married couple who reported $75,900 of taxable income in 2017 hit the high end of the 15% income tax bracket. For 2018, that same couple could report $77,400 of taxable income – hitting the high end of the 12% bracket. Additionally, the top 2017 rate of 39.6% starting at $470,700 married filing jointly taxable income is now 37% starting at $600,000.

Depreciation rules are more favorable

In 2017, a farmer could immediately deduct up to $510,000 of new and used farm equipment purchased, dollar for dollar, or take unlimited bonus depreciation on new assets to immediately write off 50% of the cost. In 2018, those dollar-for-dollar Section 179 depreciation deductions increase to $1 million of new and used asset purchases. Bonus depreciation, which continues to have no dollar limits, increases to a 100% write-off – not just for new assets purchased and placed in service in 2018 but used asset purchases, too.

Other changes

The additional depreciation deductions will be needed in 2018, as the new tax law no longer allows tax gain deferrals on equipment and livestock trades. For example, instead of trading an old tractor for a new tractor and simply reporting the net purchase, farmers are required to report the sale of the old tractor separate from the purchase of the new tractor.

The new Section 199A deduction has replaced the Section 199 Domestic Production Activities Deduction (DPAD) from 2017 and prior years. Under this new law, if your taxable income is $315,000 or less for a married couple ($157,500 for all other tax filers), a 20% deduction is available for qualified business income, which includes most farm income and related farm rental income (if under common ownership). If taxable income exceeds these thresholds, you can still qualify for this 20% deduction, but wage or property limitations come into play that could reduce the percentage of the deduction.

Capital gains rates of 0%, 15%, and 20% remain largely unchanged from prior years, so gains on the sale of farmland and raised breeding livestock are generally still taxed at more favorable tax rates.

Finally, net operating loss (NOL) carrybacks have been repealed for most taxpayers except for farmers. Prior to 2018, farm NOLs could be carried back five years or forward 20 years; however, the new tax law allows farm NOLs to be carried back only two years but forward indefinitely. These carry forward loss deductions are limited to 80% of taxable income.

So, while the 2018 farm year may not have resulted in high profits, the new Tax Cuts and Jobs Act, especially the 20% Section 199A deduction, could make your tax planning session before year end a valuable one.