Tax Reform Provisions Impacting Agribusiness: Action Needed Before December 31, 2017

On December 20, Congress approved the Tax Cuts and Jobs Act, which provides sweeping changes for businesses, trusts, and individuals. President Trump signed the bill into law on December 22. The revised version of the bill carries the title “An Act to provide for reconciliation pursuant to Titles II and V of the concurrent resolution on the budget for fiscal year 2018.” However, the bill is still commonly referred to by its former name, the “Tax Cuts and Jobs Act.”

Following is a summary of some of the key changes affecting agricultural producers along with some tax planning strategies that need to happen before the end of 2017.

Unless otherwise noted, the changes will be effective for tax years beginning after 2017. Keep in mind that these are federal changes and that state-level conformity on applicable items will remain to be seen.

Business Tax Reform - C Corporations

• Creates a flat corporate income tax rate of 21%.
• Repeals the Alternative Minimum Tax (AMT).
• Permits full expensing of fixed asset purchases. One hundred-percent expensing is allowed for qualified property acquired and placed in service after September 27, 2017, and before January 1, 2023. The “new property” requirement is removed and replaced with a taxpayer’s first-use rule.
• Increases Section 179 expensing to $1 million. The phase-out amount will be increased to $2.5 million and indexed for inflation for tax years beginning after 2018.
• Repeals requirement that property used in a farming business use the 150% declining-balance method and will provide a five-year recovery period for machinery or equipment used in a farming business. Effective for property placed in service after December 31, 2017.
• Limits interest expense for businesses with average annual gross receipts in excess of $25 million. Farming businesses can elect not to be subject to the limitation but will be required to use ADS to depreciate property with a recovery period of 10 years or more.
• Modifies net operating loss (NOL) deduction limitations. An NOL carryover or carryback will be limited to 80% of the taxpayer’s taxable income for loses arising in taxable years beginning after December 31, 2017. In addition, all carrybacks will be repealed, except for a special two-year carryback in the case of certain losses incurred in the trade or business of farming, beginning after 2017. Losses arising in taxable years beginning after December 31, 2017, shall carry over indefinitely.
• Retains the Research and Development Tax Credit, Work Opportunity Tax Credit, Low Income Housing Tax Credit, and New Market Tax Credit.
• Limits the use of like-kind exchanges. Section 1031 deferral of gain on like-kind exchanges will be available only for real property. Therefore, deferral under Section 1031 will no longer be available for exchanges of equipment, breeding livestock, or other personal property items.
• Disallows the entertainment deduction. No deduction (50% currently allowed) will be allowed for entertainment, amusement, or recreation activities, facilities, or membership dues relating to such activities. The 50% deduction for meal expenses associated with operating the trade or business is retained.
• Retains the employer-provided housing exclusion.
• Reduces the dividends received deduction:
  - Previous 80% deduction (for stock ownership of 20% or more) is reduced to 65%.
  - Previous 70% deduction (for stock ownership of less than 20%) is reduced to 50%.
• Repeals the deduction for income attributable to domestic production activities.

Business Tax Reform - S Corporations, Partnerships, and Sole Proprietors

• Introduces a new 20% deduction relating to “qualified business income” of individuals (including owner of a pass-through entity).
• Permits full expensing. One hundred-percent expensing is allowed for qualified property acquired and placed in service after September 27, 2017, and before January 1, 2023. The “new property” requirement is removed and replaced with a taxpayer’s first-use rule.
• Increases Section 179 expensing to $1 million. The phase-out amount will be increased to $2.5 million and indexed for inflation for tax years beginning after 2018.
• Repeals the requirement that property used in a farming business use the 150% declining-balance method and will provide a five-year recovery period for machinery or equipment used in a farming business. Effective for property placed in service after December 31, 2017.
• Limits interest expense for businesses with average annual gross receipts in excess of $25 million. Farming businesses can elect not to be subject to the limitation but will be required to use ADS to depreciate property with a recovery period of 10 years or more.
• Retains the Research and Development Tax Credit, Work Opportunity Tax Credit, Low Income Housing Tax Credit, and New Market Tax Credit.
• Limits the use of like-kind exchanges. Section 1031 deferral of gain on like-kind exchanges will be available only for real property. Therefore, deferral under Section 1031 will no longer be available for exchanges of equipment, breeding livestock, or other personal property items.
• Disallows the entertainment deduction. No deduction (50% currently allowed) will be allowed for entertainment, amusement, or recreation activities, facilities, or membership dues relating to such activities. The 50% deduction for meal expenses associated with operating the trade or business is retained.
• Depreciation recovery periods of 39 years and 27.5 years remain unchanged, and a singular Qualified Improvement Property category has been created, with a 15-year recovery period to consolidate several previously separate categories.
• Repeals the deduction for income attributable to domestic production activities.

Estate Tax Reform

• Increases the federal estate and gift tax unified credit basic exclusion to $10 million (indexed for inflation after 2011), which will result in a basic exclusion of $11.2 million for 2018.
• Does not provide for a repeal of the estate tax at any point in the future.

Time Is Running Out: What to Do Before December 31, 2017

With reduced tax rates in 2018, the general theme for planning is “defer income and accelerate deductions.” Planning should be discussed with your Wipfli tax professional, and you should never spend a dollar to save 40 cents in taxes, but when it makes sense you should consider:

• Prepaying expenses that are deductible for tax purposes. Farmers are allowed to deduct expenses for prepaid farm supplies (feed, seed, fertilizer, etc.) to the extent that the prepaid expenses are less than 50% of other deductible farm expenses for the tax year.   
• Accelerate fixed asset purchases that can be 100% written off.
• Sell securities with unrealized losses.        
• Begin analysis of entity elections. Make an election to convert your C corporation to an S corporation or vice versa.

If you have questions regarding the information above, contact your Wipfli relationship executive.