Agriculture and the New Tax Law

HR 1, known as the 2017 Tax Cuts and Jobs Act, was passed into law on December 22, 2017, with the majority of provisions taking effect on January 1, 2018. Christmas came early to many, although it may take all year for the IRS to establish rules and decipher the law.

The following summarizes the main changes that will have an effect on landowners and agriculture. Consult with your tax advisor for further information and guidance on how the entire tax law will directly impact you.

  • While the number of tax brackets stays the same, the marginal rates have been lowered for individuals. The top rate falls from 39.6% to 37%, and income covered by each of the lower brackets has been adjusted upward. One concern is that the new law permanently changes the indexing method for adjusting brackets to account for inflation. This change could potentially lower tax savings on a real income level over time.
  • Personal exemption has been eliminated; however, the standard deduction has increased from $6,500 to $12,000 for single taxpayers and from $12,700 to $24,000 for married taxpayers filing jointly.
  • Maximum tax rates for capital gains and qualified dividends remain unchanged.
  • State and local taxes incurred in a trade or business can still be fully deducted, although there are limits on the amount of property taxes that can be itemized from personal use.
  • Non-corporate tax payers working as a sole proprietorship, partnership, and LLC should be able to deduct 20% of their taxable income. For example, if your income is $100,000, only $80,000 would be subject to federal taxes.
  • Section 199a would have allowed some taxpayers to deduct 20% of their gross sales to cooperatives instead of 20% of their taxable income if they sell to a private company but on March 23, 2018 Congress amended Section 199a to balance the playing field for co-ops and private grain businesses. Producers who sell to a co-op will be allowed to claim any pass-through deductions from a co-op while net income from grain sales to either a co-op or private business will have a 20% reduction of federal taxable income.
  • Corporate tax rates have permanently been reduced from a maximum of 35% to 21%.
  • Section 179 expense will be increased to provide a $1 million deduction in 2018, which is up from $510,000 in 2017.
  • Bonus depreciation is now allowed on new and used property. Beginning in 2023, the percent will decrease by 20% per year.
  • Farm equipment can be depreciated in five years instead of seven years.
  • Alternative minimum tax has been eliminated for corporations but retained for individuals, trusts and estates, although the exemptions have been increased by almost 30%.
  • 1031 like-kind exchanges stay in place for real property but have been eliminated for personal property such as farm equipment and machinery.
  • Estate tax exclusions have been doubled to $11.2 million per person; however, this provision expires on 12/31/2025. Basis adjustment for property will continue. A qualified real estate appraiser can value the farm in order to “step up” the basis for heirs of an estate. Additionally, current annual gift tax exclusions are retained.

Most of the tax provisions will sunset in 2025. Despite the intention to “simplify” the tax code, the 1,097 pages of the new law seem complex. Working with your tax advisor can help you determine if any adjustments are needed in your business structure or operation to fully maximize the new tax code.