TCJA (Tax Cuts and Jobs Act) & Farmers
Under the new tax law, there are drastic changes affecting tax filing for all businesses. Farms have always had unique filing procedures and the TCJA increases the choices farmers need to make when filing. We wanted to share major changes to be aware of this year.
Major Filing Changes
Since tax rates have changed, farmers should take time to consider whether or not to file a Form 1040, Schedule J. This form is used to average all or some of your farm income by using income tax rates for the prior three years. This could lower your tax rate if your current year farm income is high and your taxable income from one (or more) of the prior three years was low.
For tax years 2017 and prior, tax law prohibited certain farming C corporations, and certain farming partnerships with a C corporation, from using the cash method of accounting. Under the TCJA, any farmer may choose to use the cash method of accounting as long as they meet the following stipulations:
- They are applying it to tax years beginning after 12/31/2017.
- They meet the gross receipts test. A farmer meets the gross receipts test if they have average annual gross receipts of $25 million or less (indexed for inflation) for three prior tax years and is not a tax shelter.
- They are not a tax shelter
Changes Related to Deductions and Other Items
Business Interest Expense
Beginning in 2018, the TCJA requires the filing of Form 8990. This form is where we’ll calculate the deductible amount of business interest expense and determine the amount to carry forward to next year. Generally the amount of business interest expense that can be deducted is limited to the sum of business interest income plus 30% of adjusted taxable income. However, certain farming businesses can be exempted from this limitation by making an affirmative election on the tax return.
Qualified Business Income Deduction
The TCJA provides many taxpayers, including farmers, a deduction for certain business income from a qualified trade or business. Eligible farmers may be able to deduct up to 20% of business income as a sole proprietor or through partnerships, LLC’s, S corporations, trusts and estates. The calculations are complicated, and the deduction may be limited in certain circumstances. Contact hb&k if you would like to discuss the deduction further.
Farmers are no longer required to use the 150% declining balance method of depreciation for 3,5,7 and 10-year property. It will continue to apply to 15 and 20-year property. Additionally, the recovery period was shortened from 7 to 5 years for machinery or equipment used in a farming business and where the original use commences with the taxpayer after December 31, 2017.
Before 2018, farmers could apply the like-kind exchange rules to machinery and equipment. Beginning January 1, 2018, Section 1031 like-kind exchange treatment applies only to exchanges of real property used in a trade or business or held for investment. Equipment can no longer be traded-in tax-free.
These are just a few of the wide-reaching changes farmers will deal with as a result of the TCJA. There are more changes, and associated opportunities, to be aware of this tax season. Please call your trusted hb&k advisor today if you need more information or to schedule a consultation.