It is more important than ever to plan ahead for taxes. 2018 was a rollercoaster in the tax area. There were a lot of ups and downs and a lot left unanswered. It is imperative to plan ahead as we begin the new year.
Gray 2018 for Taxes
2018 was full of a lot of ups and downs for taxes and much gray area. The Tax Cuts and Jobs Act of 2017 created a lot of change. Many in agriculture are struggling financially and seeing equity disappear.
Generally, financial losses are bad. On the tax side, losses are not as advantageous anymore.
In tax years beginning after Dec. 31, 2017, if the loss produces a net operating loss, there is an 80% limitation. That means NOLs created after 2017 can only offset 80% of pre-NOL taxable income.
Losses also impact trades and businesses in another way. This issue relates to Section 199A. If a trade or business produces a loss, the loss is carried forward to reduce future 199A deductions.
New Year, New Plans for Taxes
“It has been over 30 years since we last saw major tax reform,” said Paul Neiffer, a CPA and principal at CliftonLarsonAllen and a Top Producers columnist. “Most of the new law’s changes are positive, but some will make tax planning more challenging.”
This means planning for taxes has never been more important. Some feel during low-income years tax planning is less important. However, it is often more important in such years.
Neiffer, Barrett and Tidgren provided several year-end tax planning tips.
First, plan on not filing by March 1. Many farmers file and pay their income tax return by March 1. However, this year it will most likely be more beneficial to make your estimated tax payment on January 15, and then file your income tax return on April 15.
“The IRS is still finalizing the new law and related tax forms, which will make it extremely difficult for tax preparers to complete returns by March 1,” Neiffer said. The required payment due on Jan. 15 is the lesser of: 100% of 2017 tax liability or two-thirds of this years expected liability.
Second, don’t show losses. With the new tax law, the maximum loss a farmer can recognize is $250,000 single or $500,000 if married filing joint.
Generally, farmers won’t want to create a loss and there are several ways farmers can increase their taxable income, Neiffer adds. “A good option is to elect out of bonus depreciation and then use Section 179 to reduce taxable income to the optimal amount,” he says.
Third, bring in your trade documents. Formerly, the boot difference was the main component when looking at trades. Instead, we now must ‘sell’ the old asset for the trade-in value and put the new asset on the depreciation schedule with the full fair market value
Additionally, be prepared to discuss Section 199A, compare your inventory change, and review and prepare your records.
Section 199A is commonly known as the 20% pass-through deduction. To calculate their section 199A deduction, farmers will need to take several steps to prepare.
First, they will need to calculate net income or loss from each business. If total taxable income is under a threshold amount, you simply multiply net business income by 20%. If the result is less than 20% of taxable income (after subtracting capital gains), this is their Section 199A deduction.
However if it is over the threshold amount, the deduction will be limited to the greater of 50% of wages paid by the farm or 25% of wages paid plus 2.5% of qualified depreciable property.
If they sell products to a cooperative, they will need to reduce the Section 199A deduction by the lessor of 9% of net income attributable to those sales or 50% of wages paid.
Section 199A has received the most attention and triggered the most questions. Farmers should be cautious in making major changes to business structures, especially if it includes a significant cost.
Currently, the 199A deduction is only in law until 2025. Therefore, it is important to weight short term and long term benefits and consequences.
Uncertainty in Tax Reform Meeting
In addition to major tax reform, there is also a lot of uncertainty with the economy. The uncertainty and decrease in farm income means several things. Farmers need to look at several different items when financial planning for 2019.
For some, it may mean deciding whether to keep deferring income from one fiscal year till the next. For others it may mean looking at new tax brackets or considering whether it works to take advantage of Section 179 changes.
According to officials at the Center for Agricultural Law and Taxation at Iowa State University, there is one announcement in particular which could heavily impact farmers. November 20, the Internal Revenue Service issued a proposed rule providing individuals who make gifts while the basic exclusion amount is temporarily doubled will get to take full advantage of that increased BEA even if the BEA is eventually lowered at the time the donor ends up dying.
This “clawback” provision points toward a change in the tax law last year that increases the BEA from $5 million to $10 million in 2018. That provision sunsets in 2025.
This also impacts those gifting small amounts to family and those donating to charity. It is important to consult professionals regarding new tax laws and individual financial situations.
When it comes to tax strategies, there is no one size fits all plan. It is different for every farmer in every situation. This is especially true this year given new tax laws. It is crucial to consult financial advisors and experts when making decisions for 2019.
Image courtesy of Successful Farming