By, Mike Moloney, VP Financial Services
The 2018 Tax Cuts and Jobs Act arrived with a slew of changes to the tax code.
- There was a major reduction in the corporate tax rate to 21%.
- An increase in the standard deduction for all filers.
- The elimination of the personal exemption.
- A limitation of the deduction for state and local taxes.
Just to name a few.
There were also numerous changes that will affect how you file your farm tax return for 2018; I will attempt to explain a few of the changes and point you to some of the available resources and services for understanding how this effects your own taxes this year.
The Domestic Production Activities Deduction (DPAD) was eliminated and replaced by the Qualified Business Income deduction (QBI). The intent behind the QBI deduction is to equalize the tax rate paid on business income by a partner, shareholder, or sole proprietor with the new 21% tax rate paid by corporations. The calculations for the deduction are quite complicated with the final regulations recently released by the IRS consisting of 274 pages.
The major difference between the new QBI and old DPAD deduction is that DPAD was an above-the-line deduction which reduced adjusted gross income (AGI), while QBI is a below-the-line deduction that reduces taxable income. If you are a dairy farmer who had been receiving a pass thru DPAD deduction from your milk cooperative, you are likely to experience an increase in your taxable income due to the loss of DPAD. This increase will likely affect other items that were AGI based, such as the allowable advanced premium tax credit. Definitely consult a tax professional if you need more information.
Another, somewhat more beneficial change, has to do with the depreciation of farm equipment. Prior law required farm equipment to be treated as 7-year depreciable property and the use of a slower depreciation method than non-farming businesses. New law adjusts the life to 5 years for new farm equipment and allows for the same accelerated method used as non-farm equipment. Used farm equipment benefits from the accelerated method change, however, it must still be depreciated over 7 years.
Further, the ability to treat a traded-in-asset as a like-kind exchange and not be required to report any gain on the transaction has been eliminated. Any asset traded in towards the purchase of a new asset, must be reported as the sale of an asset, with the sales price being the trade value. On the plus side, the depreciable values of the asset purchased will be the full cost without considering the value of the trade.
There are a number of other changes that will impact farm tax returns in 2018. A good source of information for the changes this year is the Farmers Tax Guide
. However, it is also advised to consult a tax professional.
Beyond the rush to file taxes, farmers can work with business advisers through:
Yankee Farm Credit
or the Vermont Farm & Forest Viability
to consider how changes in the business or tax code might have an effect on the years ahead. It’s never too early to plan.
Other tax-related resources: