Robert Tufts, a visiting professor with the Alabama Cooperative Extension System, says Section 199A, the new qualified business income deduction is the most significant change for farmers in the Tax Cuts and Jobs Act.
The Section 199A deduction “is applicable to sole proprietors, partners, members of limited liability companies and also shareholders of S corporations,” says Tufts.
The deduction is usually 20% of qualified business income (QBI). QBI is specifically income from operations. It does not include capital gain, dividends, interest or other investment income. Individuals will claim the deduction on their personal tax return. It will reduce the taxable income, but not the amount of FICA owed.
If an individual’s taxable income exceeds $157,500, or a couple’s taxable income exceeds $315,000, then the deduction is limited to 50 % of W-2 wages—or 25 % of W-2 wages plus 2.5 % of the unadjusted basis immediately after acquisition of all qualified property.
Bonus depreciation is now 100% as opposed to the previous 50 %, until the year 2022. After 2022, it decreases by 20 % per year until it phases out. Tufts said used equipment now qualifies for bonus depreciation.
“The Section 179 expense amount was increased to $1 million, with a phase out beginning at $2.5 million,” Tufts said. “Improvements to residential real property for roofs; heating, ventilation and air-conditioning; fire protection and alarm systems; and security systems may now be expensed under Section 179.”
Agricultural equipment was previously seven-year-property and is now five-year-property. It qualifies for a 200 % declining balance depreciation instead of a 150% declining balance.
Other Agribusiness-Related Changes
Capital gain rates remain at 0%, 15% and 20%. These rates no longer correlate with the marginal income tax rate, but instead to dollar amounts.
If a couple’s (married filing jointly) taxable income is less than $77,200, the capital gains rate is 0%. However, if the income is over $77,200 the rate is 15%. Those with a taxable income exceeding $479,000 have a capital gains rate of 20%.
In addition, section 1031 tax-free exchanges are no longer available for personal property.
“This means when you trade in your old tractor, it will be treated as a sale instead of an exchange,” Tufts said. “This change will also require you to recognize the gain on your income tax return.”
Net operating losses (NOLs) can no longer be carried back. This excludes certain farming losses which may be carried back two years instead of five, but may be carried forward indefinitely. This is a change from the previous carry-forward cap of 20 years. Now NOLs can help businesses to eliminate only 80 % of taxable income instead of all of it.
Notable Individual Changes
The applicable exclusion amount—the allowable amount of money that one can transfer tax-free during life or death—doubled. The 2018 amount is now $11.18 million per individual, or $22.36 for a married couple.
Tufts said this is one of the changes that will sunset in December of 2025. It will return to the $5 million indexed for inflation since 2011.
“The biggest change for individuals is the increase in the standard deduction and suspension of the personal exemption,” he said. “The standard deduction for married couples filing jointly for 2018 would have been $13,000, but under TCJA the standard deduction for 2018 will be $24,000. The elimination of the personal exemption (which was $4,150 per individual) offsets this.”
Large families may have a higher income tax liability unless they have minor (under 17 years of age) children who qualify for the child tax credit. The child tax credit doubled to $2,000 and $1,400 is refundable. There is also a new non-child tax credit of $500 for older children or parents who are dependents.
Most of the 2018 income tax rates reduced. For example, the 15 % rate is now 12 %, and the 25 % rate is now 22 %.
Tufts said fewer individuals will be able to claim itemized deductions. Thus, the limit of deductions for state and local taxes is now $10,000. Individuals will no longer be able to claim miscellaneous itemized deduction such as unreimbursed travel expenses, union dues and tax preparation fees.
Dr. Robert Tufts will be conducting a workshop that deals with the Tax Cuts and Jobs Act at 9 different locations across the state throughout August and September. To find a location, view the agenda or register click here. Dr. Tufts suggests contacting a tax professional to discuss these changes and their potential effects on individuals and businesses.