Now that crops are harvested, livestock are tended to and equipment is being addressed, it may seem a little late in the year to be looking at our financial strength and year-end tax planning. However, it may not be too late. Many new changes took place with the passing of the Tax Cuts and Jobs Act (TCJA), and many items are still available to us, particularly in the ag industry. These laws can assist you in obtaining your near and long-term goals. The following are items to consider as we near the end of the year.
The TCJA shortened the recovery period allowed by farming businesses from seven years down to five. This new recovery period applies to machinery and equipment but doesn’t apply to grain bins, cotton ginning assets, fences or other land improvements. In addition, farmers may now use the 200% declining balance method instead of the 150% declining balance method. The section 179 deduction, which allows first-year expensing of assets, has increased to $1,000,000, and you also now have the option to utilize 100% bonus depreciation on qualified property.
Net Operating Loss (NOL)
Under the old law, net operating losses could be carried back five years and carried forward twenty. Under the TCJA, NOLs can only be used by farmers and ranchers, allowing you to carry back NOLs two years and carry them forward indefinitely.
Prepaid Farm Supplies
Farmers and ranchers can purchase farm supplies (feed, seed, fertilizer, etc.) to be used the following year. This deduction for prepaid farm supplies is limited to 50% of total deductible farm expenses for the year. If this limit applies, the excess is deductible in the year the supplies are used or consumed.
Deferred Payment Contract
Farmers using the cash method of accounting can enter into a deferred payment contract specifying that payment for farm products will be received in the future. This allows income to be reported in the following year rather than included in the current year income. Once a sales contract is inked, you can also elect out of the installment method, thereby bringing income into the current year, even though cash is not received until the following year.
Crop Insurance Proceeds
Generally, you must include as current year income any crop insurance proceeds you receive. However, if the following conditions apply, you can postpone reporting crop insurance proceeds until the following year:
- The cash method of accounting is used.
- The crop insurance proceeds are received in the same year the crops were damaged.
- The income from the crops that were damaged would have been included in a tax year following the year the damage occurred.
Cash wages and noncash wages (if the substance of the transaction is a cash payment) are subject to social security and Medicare taxes. Noncash wages paid to farmworkers (including food, lodging, clothing, transportation passes, farm products and other goods or commodities) are not subject to federal withholding, social security and Medicare taxes. Year-end may be a good time to bonus key employees.
Section 199A Deduction
Implemented with the TCJA, this new deduction allows for up to a 20% deduction of qualified trade or business income (subject to potential limitations). This could be a game changer for those in the ag industry. The way in which you have your entities structured should be reviewed for maximum benefits.
As with most, if not all, tax-related issues and benefits, there are exceptions and nuances that need to be considered. Having a tax specialist who understands the industry as well as the tax laws is tantamount to good planning and financial health. If you need assistance with tax planning, please get in touch with your local Wipfli agricultural professional, who will be glad to assist you.