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Producer impacts from the Tax Cuts and Jobs Act

Tax Cuts and Jobs Act (TCJA)

The Tax Cuts and Jobs Act (TCJA) was signed into law on December 22, 2017. This legislation contains substantial changes to the U.S. income tax system. TCJA affects all sectors of our economy, but the following information will only discuss the parts of TCJA that directly impact agriculture.  

  • Most provisions of TCJA were scheduled to take effect for tax years beginning after December 31, 2017.

  • Most provisions of TCJA will expire after 2025 but some provisions are permanent.

Tax rates and brackets 

Under TCJA, federal individual tax rates change (beginning in 2018) but are scheduled to expire after 2025.

  • New federal tax brackets include: 10, 12, 22, 24, 32, 35 and 37 percent.

  • These brackets replace the old brackets of: 10, 15, 25, 28, 33, 35 and 39.6 percent.

In the past, the thresholds for each of the brackets were indexed for inflation.  

  • The new brackets under TCJA are indexed for inflation under a “chained consumer price index (CPI).”  

  • This will result in smaller annual adjustments to the brackets.


Capital gains 

Under the old rules, capital gains rates included: 0, 15, 20, 25 and 28 percent.

  • Capital gains rate was 0 percent if all taxable income (including the capital gain) remained below the top of the 15 percent bracket.  

  • Capital gain that landed between the top of the 15 percent bracket and the top of the 35 percent bracket was taxed at 15 percent.  

  • Capital gain that landed in the 39.6 percent bracket was taxed at 20 percent.

Figure 1 displays how capital gains rates interacted with income tax rates.

Capital gains rates for tax year 2017
Figure 1. Capital gains rates for tax year 2017

In Figure 1, the left bar represents the old tax rates for 2017. The right bar represents where the breaks for the various capital gains rates were in 2017. Under TCAJ, the breakpoints for the 15 and 20 percent capital gains/qualified dividends rates are set as statutory dollar amounts and adjusted for inflation.

See Figure 2 for the capital gains rates for married filing joint (MFJ), head of household (HOH), single and married filing separate (MFS).

Figure 2: 2018 Capital gains rates

Capital gains rates Joint filers (MFJ) and surviving spouses Head of household (HOH) Single Married filing separate (MFS) Estates and trusts
0% < $75,900 $50,800 $37,950 $37,950 $2,550
15% < $470,700 $444,550 $418,400 $235,350 $12,500
20% $470,700 $444,550 $418,400 $235,350 $12,500

Standard deduction and personal exemptions

Effective for 2018, TCAJ substantially increased the standard deduction and eliminated all personal exemptions. See Figure 3 for standard deduction amounts.

Figure 3: 2018 standard deduction

Filing status 2017 2018
Single or MFS $6,500 $12,000
MFJ or QW $13,000 $24,000
HOH $9,550 $18,000
Age 65 and/or blind MFJ, QW or MFS Single or HOH $1,250
$1,550
$1,300
$1,600
  • MFS - Married filing separately
  • MFJ - Married individuals filing joint returns
  • QW - Qualifying widow(er)
  • HOH - Heads of household

Kiddie tax 

Kiddie tax applies to “unearned” income of children that are:

  1. Less than age 19.

  2. College students less than age 24.

Unearned income is typically investment income. Earned income is W-2 wage income and farm income reported on Schedule F.

  • The final threshold amount for 2018 has not been posted at this time.

  • The 2017 threshold was $2,100.For kids over age 17, the kiddie tax applies only to children whose earned income does not exceed one-half of the amount of their support.

Beginning in calendar year 2018, the tax rate for dependents that meet the kiddie tax test will be taxed not at the parents’ tax rate, but rather at the estate and trust rates.


Child tax credit

Effective for tax year 2018, the child tax credit is increased to $2,000 per qualifying child. The credit is available for a qualifying child under the age of 17. Income phase-outs exist for the child tax credit.

The Tax Cuts and Jobs Act also created a credit for qualifying dependents.

  • The new $500 credit is for a qualifying dependent age 17 or older.

  • This child or relative must meet the dependency requirements.

  • If the dependent is a child, the dependent needs to be under age 19 at the end of the year, or a full-time college student who is age 24 or less at the end of the tax year.

  • A disabled child of any age qualifies for the credit (must meet dependency requirements).


Charitable contributions 

Taxpayers who are able to itemize can include charitable contributions on their tax return.

  • TCJA increased the limitation from 50 percent of Adjusted Gross Income (AGI) to 60 percent of AGI.

Gift of commodity

Farmers are encouraged to consider gifts of commodities as charitable contributions.

  • When you gift a commodity, the farmer does not have to report the income.

  • The farmer is still able to deduct the production expenses associated with growing the commodity.

Gift of grain

A gift of grain needs to be given the year after the crop was produced.

  • Under Revenue Ruling 55-531, a farmer is not allowed to deduct the production costs of grain used for a gift in the year of production.

  • If grain is gifted in the same year of production, Schedule F costs should be reduced in proportion to the amount of the gift of grain.

Rules for charitable contributions

Rules for charitable contributions differ from the rules for gifts.

  • Charitable contributions made in the same tax year as produced or grown do not require a reduction of schedule F expenses [Reg. 1.170A-1(c)(4)].

  • The farmer does not get an itemized charitable deduction for the charitable contribution of the commodity.

  • But, expenses connected to the production of the grain will be deducted on Schedule F.

  • The gifted grain is not included in income thus reducing regular and SE tax, according to Harris in Agricultural Tax Issues.


Affordable Care Act

TCAJ does not change anything in 2018 related to the Affordable Care Act (also known as Obamacare).

  • In 2019, the penalty for failing to maintain minimum essential coverage for individuals is repealed.

  • Net Investment Income Tax (NIIT) remains unchanged.


Corporate rates 

Tax rates for C-corporations are reduced to 21 percent beginning with tax years starting after January 1, 2018. This provision of TCAJ is permanent.


Alternative minimum tax (AMT)

For tax years beginning after December 31, 2017, C-Corporations are no longer subject to AMT. C-Corporations with an AMT credit may offset regular tax liability (moving forward). Phase-outs will apply.

TCAJ retains AMT for individuals. New legislation temporarily increases (through 2025) the AMT exemption. This has made it more difficult for individuals to qualify for AMT.


Domestic production activities deduction (DPAD) 

Domestic production activities deduction (DPAD) is repealed for tax years beginning after 12/31/18.

  • Elements of DPAD still remain with respect to the new qualified business income calculation (QBI).
  • Many cooperatives run fiscal years that differ from the calendar year. It is possible that producers could receive a pass-through DPAD from the cooperative because the current tax year (or currently reportable) tax year began before 12/31/18.
  • Any cooperative DPAD pass-through will be reported on Federal Form 1099-PATR.

Like-kind exchanges (LKE) 

TCAJ modified the like-kind exchange rules so that only real property qualifies.

  • Real property includes land and any property attached to the land.

  • This law change effectively eliminates non-recognition of gain on a machinery trade.

Under the old LKE rules, a taxpayer (in this case, a farmer) trades a piece of equipment on a newer piece of equipment. As long as the farmer did not receive any money in the transaction, the gain is postponed and any cash paid plus the old basis in the equipment becomes the new equipment basis.

  • Under the new rules, the traded piece of machinery traded will be treated as an outright sale.

  • For most cases, this will result in depreciation recapture (ordinary income not subject to self-employment tax).

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Net operating losses (NOLs) 

Two-year carryback and special carryback provisions are repealed except for losses incurred in the business of farming (ag no longer has a five-year carryback).

NOL carryovers are allowed indefinitely (changed from 20 year limit under old rules).

  • TCJA limits the NOL deduction (absorption) to 80 percent of the taxable income in the carryback/carryforward year.

  • In other words, an NOL cannot zero out all taxable income in any given year. The new rules set forth by TCAJ only affect NOLs incurred in 2018 moving forward.

  • This provision still needs clarification by Congress or the Internal Revenue Service.


Depreciation 

  • New farm machinery for tax years beginning after 12/31/17 will be classified as 5-year property instead of 7-year property.

  • Used farm machinery will still be classified as 7-year property.

Farm assets in the 3 to 10 year class life are eligible for 200 percent DB method.

  • The previously approved method was 150 percent DB method.

  • 200 percent DB method provides a higher percentage of depreciation in the first years of use.

Farm assets in the 15 and 20-year class life still use 150 percent DB method.

Example: comparison of 150 and 200 percent DB method

Farmer Jones purchased a combine in 2017 for $430,000. Farmer Jones did not take section 179 or bonus depreciation on the new combine.

  • Farmer Jones; depreciation for 2017 will be $46,071 ($430,000/7 x .5 x 150%).If Farmer Jones had purchased the same combine in 2018 the depreciation deduction would be $86,000 ($430,000/5 x .5 x 200%). This is an increase of $39,929.


Section 179 

TCAJ increased the section 179 limit to $1 million. Investment phase-out begins at $2.5 million. The SUV limitation remains at $25,000.

  • Previously defined property eligible for section 179 is still eligible under TCAJ.

  • Generally, this property includes property with a depreciable life of three through 15 years.

  • TCAJ expanded the definition of qualifying section 179 property to include:

    • Roofs.

    • Heating, ventilation and air conditioning property.

    • Fire protection and alarm systems.

    • Security systems.

    • Property used predominantly to furnish lodging, such as furniture and appliances.

    • Computers and peripheral equipment are removed from the definition of listed property.

Section 179 and Minnesota

The State of Minnesota does not recognize the new qualifying property added to the section 179 list from the Tax Cuts and Jobs Act.

  • In other words, Minnesota will not recognize section 179 on roofs, heating, ventilation and air conditioning property.

  • Any section 179 taking on the federal return for the newly added assets from TCJA will need to be added back on the Minnesota return.

After establishing the qualifying property for the State of Minnesota return for section 179:

  • The state will allow a 100 percent deduction for the first $25,000.

  • For all amounts above $25,000, an 80 percent add-back is required.

In other words, the taxpayer will get a 20 percent deduction for the excess amounts in the current year and a 20 percent deduction in the four subsequent years.


Bonus depreciation 

TCAJ expanded the use of bonus depreciation to 100 percent for assets purchased between September 28, 2017 and December 31, 2022.

  • TCAJ changed the requirements for bonus depreciation to include new or used property (formerly first use requirement is repealed).

  • For a taxpayer’s first tax year ending after 9/27/2017 (2017 calendar year taxpayer), a taxpayer may elect to apply a 50 percent allowance instead of 100 percent allowance.

Bonus depreciation and Minnesota

The State of Minnesota is also de-coupled from the Federal rules for bonus depreciation (Additional First-Year Depreciation).

  • Similar to Section 179, Minnesota does not recognize the most recent changes for bonus (i.e., used property and the 100 bonus rate).

  • Prior to the TCJA, the federal bonus percentage was scheduled to be at 40 percent for 2018. This is where the State of Minnesota begins the calculation.

State of Minnesota calculation

  1. First, all bonus depreciation taken on used assets on the federal return will not qualify for Minnesota and needs to be added back (i.e., used equipment).

  2. Then the taxpayer takes assets with bonus depreciation elections from the federal return.

  3. The taxpayer reduces the 100 percent allowance to 40 percent.

  4. The 60 percent excess is added back to the basis of the asset for Minnesota depreciation purposes.

  5. From the 40 percent bonus depreciation, an 80 percent add-back is performed for the entire 40 percent amount.

Minnesota bonus add back - example 5

Farmer Jones purchased a new utility tractor for $60,000. Farmer Jones elected to take 100 percent bonus on the asset for Federal tax purposes.

  • For Minnesota, farmer Jones must reduce the $60,000 of bonus from the federal return to 40 percent of the purchase cost (($24,000) $60,000 x .4 = $24,000). The excess $36,000 gets added to the basis of farmer Jones’ utility tractor on the Minnesota depreciation schedule.

  • The 40 percent bonus depreciation amount for 2018 is $24,000. Eighty percent of the $24,000 will need to be added back as income reducing the 2018 bonus expense for the new utility tractor to $4,800 ($24,000 x .2 = $4,800).

Bonus depreciation percentage will begin to phase-down beginning in 2023 and go to zero in 2027. See Figure 7 for phase-down schedule.

Bonus depreciation percentages

Portion of basis of qualified property acquired before Sept. 28, 2017. Figure from The Tax Book.
Placed in service year Qualified property in general/specified plants Longer production period property and certain aircraft
Jan. 1, 2017-Sept. 27, 2017 50% 50%
Sept. 28, 2017-Dec. 31, 2022 100% 100%
2023 80% 100%
2024 60% 80%
2025 40% 60%
2026 20% 40%
2027 None 20%
2028 and thereafter None None

Most farm assets will be included in the second column (qualified property in general/specified plants). Longer production period property will include 15 and 20-year property (drainage tile and single-purpose ag. structures).


Meals for employees – fringe 

Meals provided to employees for the convenience of the employer have been 100 percent deductible in the past.

  • TCAJ modifies the meals for employee rules so that expenses for employer-operated eating facilities are only 50 percent deductible through 2025.

  • In 2026, the aforementioned meal expenses become nondeductible.


Federal estate and gift tax 

TCAJ increased the federal exclusion amount to $11,180,000 for 2018.

Each individual has an annual gift exclusion of:

  • $14,000 – couples together total $28,000 – 2017.

  • $15,000 – couples together total $30,000 – 2018.

Each individual has a life-time gift exclusion equal to the federal estate tax exclusion:

  • $5,490,000 for 2017.

  • $11,180,000 for 2018.


Section 199 

Section 199 refers to the domestic production activities deduction (DPAD).

  • TCAJ repeals DPAD for tax years beginning after 12/31/17.

  • Although TCAJ repeals DPAD, elements of the DPAD calculation remain with the addition of Section 199A (AKA the grain glitch).

Section 199A

Passage of the original legislation for TCJA contained what has come to be known as the “grain glitch”. Farmers that sold to a cooperative opposed to selling to a private business were given a huge incentive.

  • Sales to co-op: 20 percent pass-through deduction based upon gross sales.

  • Sales to non co-op: 20 percent pass-through deduction based upon the net.

Passage of Section 199A caused a great deal of anxiety and confusion in that producers recognized the significant financial benefit of selling to a cooperative entity versus a non-cooperative entity.

Please note that the passage of Section 199A was intended to address an incentive for all non-corporate business entities. C-corporations are not eligible for a section 199A deduction (qualified business income or QBI).

Consolidated appropriations act (CAA)

The Consolidated Appropriations Act modified TCAJ with respect to sales to cooperatives. The 20 percent deduction is based on qualified business income (QBI).

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Tax planning

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Note: This information piece is offered as educational information only and is not intended to be tax, legal or financial advice. For questions specific to your farm business or individual situation, consult with your tax preparer.

C. Robert Holcomb, Extension educator

Reviewed in 2019

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