As we move into tax season, it’s a good reminder that there were quite a few changes made by the Tax Cuts and Jobs Act (TCJA) impacting ag producers.
Although we don’t anticipate any major tax legislation for the 2020 filing season, if there are changes, they are likely to be minimal in comparison to the changes made by the TCJA.
So, what do you need to know for the 2019 filing season? Here are the top seven things to remember:
1. Qualified business income (QBI) deduction
Section 199A’s QBI deduction allows taxpayers with QBI to claim a deduction on their individual tax return equal to 20% of the QBI amount, resulting in meaningful federal tax savings. Many farmers qualify with their rental income. We took a look at the requirements, as well as aggregation rules, in this blog.
2. Section 199A and cooperatives
The IRS also released further guidance on Section 199A for cooperatives, and it answered many questions created by the “grain glitch” fix passed in 2018. Click here to read the blog where we go through these questions, such as what counts as a specified cooperative and how expenses and W-2 wages are allocated between sales to a cooperative and other qualified receipts.
3. Excess business losses
Another TCJA change was to prevent excess business losses from being deducted in the current tax year. Instead, the losses must be carried forward and treated as part of the taxpayer’s net operating loss in the subsequent tax year.
What does this mean for taxpayers? Is it a good or bad thing? We answered these questions in this article here.
4. Depreciation changes
The TCJA brought three depreciation changes affecting ag producers.
First, it shortened the depreciation period for farming machinery and equipment from seven to five years.
Second, property used in farming and placed into service after 2017 is no longer required to be depreciated using the 150% declining-balance method, unless it is a 15-year or 20-year property.
And third, farming businesses that elect out of the new 30% business interest deduction limitation must use ADS to depreciate any property with a depreciation life of 10 years or more.
5. Section 1031
Under the TCJA’s Section 1031, like-kind exchanges will be allowed only for real property. Any exchanges involving personal property, equipment or breeding livestock are required to recognize taxable gain in the year the exchange occurred. The newly acquired property is then treated as a purchase, eligible to be depreciated.
6. Meals and entertainment
Prior to the TCJA, you could deduct 50% for meals and entertainment expenses if they were directly related to the taxpayer’s business. Now that deduction is only available for meals. You can read more about this change here.
7. The SECURE Act
Finally, a change that has nothing to do with the TCJA! The SECURE Act legislation only recently passed, but it’s brought quite a few significant changes with it. All in all, it has 30 provisions, many of which are designed to bolster retirement savings.
Some of the provisions affect retirement plan sponsors. For example, small ag businesses that start a retirement plan could receive tax credits up to $5,000 per year for three years, which is 10 times what the credit was prior to the SECURE Act. These credits are in addition to the potential $500 credit for adding automatic enrollment to your plan.
Other provisions affect individuals. Here are the top three ways individuals are affected:
First, there are now no age restrictions for contributing to a traditional IRA, which is great news.
Second, for those reaching age 70.5 after December 31, 2019, the age for taking Required Minimum Distributions from 401(k)s, traditional IRAs and defined contribution plans has been raised from 70.5 to 72.
And third, if an individual inherits an IRA or 401(k) from someone other than their spouse, they must distribute its full value by the end of the 10th calendar year following the original owner’s year of death, subject to certain exceptions. This only applies to IRAs and defined contribution plan benefits inherited from those who pass away after 2019.
Our advice: You may want to review your beneficiary designations and estate plan in order to maximize benefits under the new rules. Click here to read more about the SECURE Act.
If you have any questions about the above seven changes or how they impact you and your business, contact your Wipfli relationship executive. We’re here to help through this tax season.