Ag producers in many states could use some relief from wet weather conditions delaying spring planting. Many of you are fighting the clock and calendar, and my thoughts are with you. You deserve a break — and maybe even some market stability.
Now that the tax season has passed, bringing relief to accountants across the country, it’s a good time for reflection. I’ve now gone through 38 tax season deadlines. Not only have I survived — I also have made observations about the 2018 tax filing season, which certainly came with a lot of changes.
We’ve seen a jump in the number of follow-up letters the IRS is sending to ask you for more information or notify you of the challenges it’s having in matching up items on your returns to your different forms (e.g., W-2, 1099, etc.). If you receive one of these notices, the last thing you should do is ignore it. Pass it along to your tax preparer so that they can analyze it and respond appropriately. Many of these notices being sent out won’t result in additional tax.
Tax Return Extensions
We’ve also seen a lot of tax return extensions. This is not only due to the Tax Cuts and Jobs Act (TCJA) but also because of the U.S. government shutdown and certain tax software program issues.
With business tax returns, it’s typically better to take the time to make sure it’s right before your initial filing than to make corrections with an amended tax return, but despite rumors, filing a properly extended tax return does not increase your chances of being audited by the IRS.
Business Tax Return Changes
We knew the TCJA would be a big adjustment, but now that we’ve gone through one tax filing season, we can make some observations about the most common areas of change.
Tax Rates: Smaller C corporations lost the lower 15% tax bracket — and felt it. Corporations with less than $50,000 of taxable income now pay 21% tax instead of 15%. On the other hand, corporations with higher incomes saved significantly, and most individual taxpayers (including those involved with S Corporations or partnership business entities), saved more due to the lower tax rates.
Depreciation Deductions: Expanding 100% bonus depreciation and increasing Section 179 expense election limits created more options to save in your taxes if you purchased or built new farm assets.
Standard and Itemized Deductions: Increased standard deductions and limits on itemized deductions have resulted in planning opportunities for ag producers. Be aware that contributing crops or livestock directly to charity results in significantly better tax savings than selling crops and livestock and then donating the money to charity.
Section 199A: The Qualified Business Income Deduction, or Section 199A, may have saved many taxpayers a lot, but it also added new complexities to returns, which took more time to go through and resulted in higher preparation fees. Especially as it concerns farm cooperatives, we are waiting for additional IRS guidance on several matters involving the 199A deduction.
Choosing a Business Entity: While there isn’t a “one size fits all” solution here, you should evaluate or re-evaluate your choice of business entity because the parameters and impact points have changed in the new tax environment.
Net Operating Losses (NOLs): Tax law changes have significantly altered NOL options. Now, an ag producer can only carryback a loss to the prior two years taxable income, with the unused loss carrying over indefinitely. However, the carryover can only offset 80% of the future year taxable income, which means there is a limited benefit. Note that under the excess business loss concept, if you are married and filing jointly, a net business loss over $500,000 must be separately carried forward. Familiarize yourself with current-year loss options and limitations and have a discussion with your tax specialist to see how you’re affected.
Equipment Trade-Ins: Not all your business assets are real estate. The new tax law treats the trades of these business assets differently now, with the most common transaction affected being the trade-in of farming equipment and vehicles. Under the new law, the trade-in allowance must be reported as a sale of the traded-in asset, and the new asset must be depreciated using the full purchase price. While there are now opportunities to use fast depreciation, make sure you carefully consider the tax impact of trade-ins, including self-employment taxes.
While the TCJA has created new opportunities, understanding and capturing the biggest benefits for agriculture producers still requires effort and collaboration. Wipfli specializes in both the agriculture industry and tax, so we are in the perfect position to understand how your business is affected by tax law changes and how you can maximize the benefits. If you have any questions or comments, I can be reached at firstname.lastname@example.org. Also, check out our Ag blog for more information on other ag-specific topics.