• 2017 Tax Cuts and Jobs Act was passed in December, 2017
• Guidance and regulations continue to be issued even now
• Farming operations, which are often capital-intensive, can benefit from many of the recent changes

• If incorporated, the business may pay income taxes (C corp), or the income may flow through to the owners and be taxed there (S corp)
• Many farming operations are not incorporated, and so they are taxed on the owners’ personal return
• Many farmers are also landlords to the operations, which has different tax implications and planning opportunities

TAX OPPORTUNITIES FOR FARM BUSINESSES

STRATEGIES FOR USING CASH METHOD TO MANAGING TAXABLE INCOME

• Most farm businesses can take advantage of cash basis method for reporting taxable income
  • Ag exception for corporations, partnerships and individuals
  • Taxed on income received and expenses paid
  • In a good year, start looking early for opportunities to prepay expenses
    • Look for vendors that offer a discount for early payment
    • Consider the reliability of the vendor
• Make sure to determine your target taxable income
  • Creating too many expenses can result in lower tax benefit
    • Income under ~ $40K single / $78K married is only taxed at 12%, so you could easily be taxed at a much higher rate later
  • May need to consider the effect on all the family / owners
  • Consult with your CPA regularly during the year, and to refine your strategy in Q4

STRATEGIES AROUND ACCELERATED AND BONUS DEPRECIATION

• Bonus depreciation
  • 100% write off in year placed in service
    • Not the same as just writing the check
    • Available for assets in service even if financed
  • Is available for equipment and similar purchases
  • Not land and buildings
    • But be sure to segregate fixtures, etc. from buildings
    • Fixtures, etc. can be depreciated more quickly and may be eligible for bonus depreciation
  • Bonus depreciation is elected (or not) for all assets in the same class
    • i.e., all 5 year property, all 7 year property…
    • this is relevant for managing taxable income to a target
    • too much depreciation can provide a diminished return / lower tax benefit
• IRC Section 179 depreciation
  • Similar to Bonus depreciation – 100% write off in year placed in service
  • Differences
    • Capped at $1M for businesses with up to $2.5M of assets placed in service in a year (indexed annually)
    • Related businesses are aggregated for consideration of total assets placed in service
    • Can be elected for individual assets
    • Can be useful in managing target taxable income
• Depreciation is a tool to be managed, NOT a given
  • It’s important not to “overshoot” target taxable income
  • Consider the effect of depreciation compared to financing terms
    • If an asset is fully depreciated in year 1, expenses will not align with repayments in future years
  • If an asset is fully depreciated in year 1, could have to recognize gain if sold in a later year

QUALIFIED BUSINESS INCOME DEDUCTION (QBID)

• New deduction under the TCJA starting in 2018
• Generally creates an additional deduction = 20% of ordinary income
  • Limitations can apply if income exceeds $315K
• Deductible by S corps, partnerships and individuals
• Applies to active agricultural operations
• Factors into managing target taxable income as mentioned previously
• May apply to rental activities
  • Rental activities are considered passive, and most were not historically considered a trade or business
    • Most rental activities also did not have to file forms 1099
  • IRS issued new guidance in 2019 that, if the rental activity could be considered a trade or business, then it could qualify for the QBID
    • If it is considered a trade or business, then it must consider whether forms 1099 are needed for unincorporated vendors paid >$600 during the year
    • Penalties for not filing 1099s are significant – $50 to $550 per form not filed
  • Consideration of trade or business is based on the situation
    • whether owner actively manages the property vs pays a property management company, for example
  • If you have not had this conversation with your CPA yet, do it ASAP

INDIVIDUAL TAX PLANNING STRATEGIES UNDER TCJA

STANDARD VS ITEMIZED DEDUCTIONS

• This is the largest single change to individual returns outside of the business provisions
• Majority of individuals now utilize standard deduction
• Itemized deductions now comprised of very few items
  • Medical expenses, but only if more than 7.5% of your income
  • State income and property taxes, but capped at $10K
  • Home mortgage interest, now capped at $750K of debt
  • Charitable deductions
• Charitable donations are likely the only discretionary item
• Strategies for maximizing charitable contributions / itemized deductions
  • “Bundle” charitable giving into alternate years, taking standard deduction in the other years
  • Consider a donor-advised charitable fund, and use the fund as a tool in managing your target taxable income
  • Consider donating appreciated assets
  • Consider donating from your IRA

NEW – SETTING EVERY COMMUNITY UP FOR RETIREMENT ENHANCEMENT ACT OF 2019 (SECURE ACT)

• Passed in December, 2019 (heavy sigh…)
• Most provisions effective for 2020 and future years
• New provisions around Employer-sponsored retirement plans
  • New $500 Credits for Small Employer Startup and Automatic Enrollment
    • available for 3 years to offset new plan startup costs and startup or conversion costs of plans allowing automatic enrollment
• Allows long-term (at least 3 years), part-time workers who work more than 500 hours per year to participate in employer-sponsored retirement plans
  • Previous rules was that employees had to work more than 1000 hours in a year to be eligible
• Allows late adoption of a new plan – up to the extended due date of the plan sponsor’s tax return filing
• New provisions affecting individuals
  • Individuals may continue to contribute to IRAs after age 70 ½
  • Required minimum distribution (RMD) age increased from 70 ½ to 72
• Allows penalty-free withdrawal up to $5,000 for birth or adoption of a child
  • Each parent can withdraw up to $5K within 1 year of birth or adoption
• IRC Sec 529 plans have been expanded to allow distributions for
  • Registered apprenticeship programs – fees, books, supplies and equipment
  • Qualified education loan repayments up to $10,000
• Effective for distributions after 2018
  • Changes in RMD distributions to designated beneficiaries
    • Previously beneficiaries were generally allowed to stretch IRA distributions over the beneficiary’s life / life expectancy
• New rule for non-spouse beneficiaries – the entire interest must now (generally) be distributed within 10 years after the death of the IRA owner
  • A few exceptions still exist
  • This rule change can make a big impact on previous estate planning
  • Consult with your CPA &/or attorney