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Farmer and Farmland Owner Income Tax Webinar
Chris Bruynis, Davis Marrison, and Barry WardOSU Extension
Chris Bruynis
Circular 230 Disclosure
The information provided in this presentation is for educational purposes only. This presentation is designed
to provide accurate and authoritative information concerning the subject matter covered, but it is
communicated with the understanding that the publisher is not engaged in rendering legal, accounting, or other professional services. If legal advice or other expert assistance is required, the services of a competent
professional person should be sought.
Teaching ObjectivesDiscuss Key Provisions of Tax Cuts & Job Act of 2017 Which May Impact Farm Operations.• General Tax Provisions• Schedule A Deductions• Federal Estate Tax• Depreciation Changes• Like-Kind Exchanges• Net Operating Loss• Qualified Business Deduction• §199A and Ag. & Horticultural Cooperatives
2018 Farmers Tax Guide
Get a copy of the Farmer’s Tax Guide at your local County Extension office or access it on-line at:http://www.irs.gov/pub/irs-pdf/p225.pdf
New Tax Brackets
• The new tax brackets are effective for years after December 31, 2017 and expire after December 31, 2025.
• The income tax brackets will be adjusted for inflation after December 31, 2018 and rounded up to the next lowest multiple of $100 in future years.
Head of Household
• The tax act retains the head-of-household filing status that originally was to be eliminated under the House legislation.
• However, the new tax act requires the Treasury department to issue due diligence requirements that pertain to paid preparers in determining whether or not an individual qualifies to file as head of household. • A penalty of $500 per instance is to be assessed against paid preparers
who fail to meet the requirements for determining the correct status.
Individual
Married Filing Jointly
2017 Tax Brackets 2018 tax brackets
Rate Income Bracket Rate Income Bracket
10% $0 - $18,649 10% $ 0 - $19,049
15% $18,650 - $75,899 12% $19,050 - $77,399
25% $75,900 - $153,099 22% $77,400 -164,999
28% $153,100 - $233,349 24% $165,000 - $314,999
33% $233,350 - $416,699 32% $315,000 - $399,999
35% $416,700 - $470,699 35% $400,000 - $599,999
39.60% $470,700+ 37% $600,000+
Long-Term Capital Gains Rate
2017 Tax Brackets 2018 Tax Brackets
Tax Bracket Capital Gains Rate Income Bracket Capital Gains
Rate
10% 0% S $0 – $38,600 0%
15% 0% MFJ $0 – $77,200 0%
25% 15% S $38,601 – $425,800 15%
28% 15% MFJ $77,201 – $479,000 15%
33% 15% S $425,801+ 20%
35% 15% MFJ $479,000+ 20%
39.60% 20%
Standard Deductions & Exemptions
2017 2018
Filing Status Deduction Deduction
Single $6,350 $12,000
Married Filing Jointly $12,700 $24,000
Head of Household $9,350 $12,000
Personal Exemption $4,050 none
Standard Deduction
• The additional standard deduction for the elderly and blind are retained and, thus, not changed.
• For years after 2018, the standard deduction will be indexed for inflation using the chained consumer price index for urban consumers.
Schedule A Deductions
1. State/Local/Property Tax (SALT)2. Medical and Dental Expense Deduction3. Home Mortgage Interest Deduction4. Personal Casualty & Theft Loss Deduction5. Charitable Contribution Deductions6. Misc. Itemized Deductions Subject to 2% Floor
State and Local Taxes (SALT) Deductions
• Under the new plan, taxpayers who itemize will be able to deduct their state individual income, sales and property taxes up to a limit of $10,000 in total starting in 2018 ($5,000 for individual filers).
• Previously, the deduction was unlimited. • deduct either individual income taxes or sales taxes. • property taxes previously were also entirely deductible.
SALT Deduction - Business
• Please note that this provision DOES NOT pertain to the taxes accrued or paid in carrying on a trade or business.
Medical and Dental Expenses
• Medical and dental expenses remain in place but are tweaked. • Before tax reform – excess above 10% of your adjusted gross
income (AGI).• AGI $40,000; medical expenses $5,000• $5,000 - (10% x $40,000 = $4,000) = $1,000.
• After tax reform - 7.5% is in place for two years retroactive to January 1, 2017.• AGI $40,000; medical expenses $5,000• $5,000 - (7.5% x $40,000 = $3,000) = $2,000.
Home Mortgage Interest
• Interest on up to $750,000 in mortgage debt can be deducted• This cap affects home purchases made after December 14, 2017.
• A mortgage from December 14 or earlier • Deduct interest on up to $1 million in debt (the old cap) • Prior to the new law, interest on up to $100,000 in home equity debt
was also deductible meaning interest on $1.1 million could be claimed. • The new legislation wiped out the deduction for home equity debt,
including on existing loans, beginning in 2018 unless used to substantially improve home.
Casualty and Theft Losses
• Casualty losses were eligible prior to 2018 as itemized deductions to the extent that they exceeded $100 plus 10% of your adjusted gross income. • Events included natural disasters, fires, robberies, and other
qualifying occurrences. • The new law now preserves the deduction only for disasters
for which a presidential disaster area declaration was made.• Property used in trade or business still qualifies
Charitable Contribution Deductions
• Itemized charitable deduction remained unchanged. • However with the higher standardized deduction, this
may be a moot point.• Filers who plan their charitable gifts may be able to get
themselves over the new standard deduction and itemize — if they use a strategy called "bunching."
Schedule A Deductions
• Miscellaneous deductions which exceed 2% of your AGI will be eliminated for the tax years 2018 through 2025. • This includes deductions for unreimbursed employee expenses and tax
preparation expenses. • It includes expenses that you incur in your job that are not reimbursed,
like tools and supplies; required uniforms not suitable for ordinary wear; dues and subscriptions; and job search expenses.
• These expenses also include unreimbursed travel and mileage, as well as the home office deduction.
Schedule A Deductions
• Please note that the elimination of unreimbursed employee expenses only affects taxpayers who claim an employee-related deduction on Schedule A.
• As a business owner filing a Schedule C or Schedule F, your business-related deductions are not affected by the elimination of Schedule A deductions.
Hobby Farm Example
• Hobby farm expenses can be entered to offset hobby farm income on Schedule A under other income.
• With the larger standardized deduction, these may be lost under the new rules.
• Before, if you claimed the income and deducted the itemized deduction it cancelled each other out. Now if you claim the income and cannot itemize (standard deduction is larger) your hobby farm may increase your net tax liability
Timber Considerations
Ownership Issues• Owned as a business – schedule C
• Timber expenses are fully deductible including state and local taxes• Owned as an investment – Schedule A
• Timber expenses are no longer deductible• Option to elect state and local property taxes as part of the timber
costs (capitalize the expenses) and deduct upon sale of timber.• Schedule A deductions limited to $10,000
New 1040
New 1040
David Marrison
Topics
1. Estate & Gift Tax Update2. Farm Equipment Depreciation3. First Year Depreciation4. Section 179 Expensing5. Like Kind Exchanges6. Net Operating Loss7. Cash Accounting
Federal Estate Tax
Federal Estate Tax
Federal Exemption was $5,490,000 for 2017. Tax Reform increased limit- $11,180,000 for 2018.Excess taxed at maximum of 40%.Annual gift exclusion is $15,000.Step up in basis has been continued.In 2026, will revert back 2017 levels.
Ohio Estate Tax
As of January 1, 2013, the Ohio Estate Tax has been repealed.
Don’t Let Sleeping Dogs Lie
Equipment Depreciation
Class Life of Assets – Prior to New Tax All assets are placed into an asset class (regardless of the
practical or real useful life of the asset. MACRS Classes: 3, 5, 7, 10, 15, 20, 27.5, & 39
3 year: breeding hogs, non-race horses over 12 years old. 5 year: breeding livestock, goats, dairy cattle, sheep, trailers,
computers/calculators, logging equipment, solar property, & farm truck 7 year: farm equipment & machinery, grain bins, fences, office
equipment, horses, younger than 12 years old, anaerobic digesters 10 year: greenhouse, single purpose structures, orchards, & vineyards. 15 year drainage tile & paved lots 20 year: farm buildings & storage (apples, onion, potato)
Modified Accelerated Cost Recovery System (MACRS)General Depreciation System
150% Declining Balance- used for farm equipment*200% Declining BalanceStraight lineAlternative Depreciation SystemStraight line
A Comparison of Depreciation SchedulesYear MACRS 150% MACRS 200% Straight-Line
2018 (1/2 Year) $5,357 $7,143 $3,571
2019 $9,566 $12,245 $7,143
2020 $7,516 $8,746 $7,143
2021 $6,124 $6,247 $7,143
2022 $6,124 $4,462 $7,143
2023 $6,124 $4,462 $7,143
2024 $6,124 $4,462 $7,143
2025 (1/2 Year) $3,062 $2,231 $3,571
For Used Tractor: Purchase Price of $50,000
Changes for Farm & Machinery Depreciation
Cost recovery period is now 5 years (not 7) for new farm machinery and equipment.Grain bins, fences, and used equipment stay as 7 year assets.200% declining balance is to be used on 3, 5, 7 and 10 year property. 150% declining balance on 15 and 20 year property.Trees and vines are 10 year property – previously SL, now 150 DB.
What a Difference a Year Makes
$430,000 new combine purchase with out Bonus or Section 179 Depreciation
2017- $46,071 depreciation($430,000/7 x .5 x 150%)
2018- $86,000 depreciation($430,000/5 x .5 x 200%)
$39,929 more
Accelerated Depreciation
Bonus Depreciation Section 179
A Look Back at PreviousBonus Depreciation Rules
Bonus Depreciation Requirements:Recovery period of 20 years or lessOriginal use commenced with Taxpayer. Property required to be depreciated through Alternative Depreciation System (ADS) is not eligible for this deduction.Placed in service before1/1/2020.
Old Phase Out
Bonus Depreciation Rules50% deduction allowed through 201740% for 201830% for 20190% for 2020 and later
NEW Bonus Depreciation Rules
Expands to 100% for next five years.For property placed in service after 9/27/2017. Recovery period still 20 year or less.Removes requirement that usage must begin with taxpayer.Both new and used equipment is eligible.Family sale restrictions.
New Phase Out
Bonus Depreciation Rules100% through 202280% for 202360% for 202440% for 202520% for 20260% for 2027 and beyond
Section 179-Equipment Expensing
Can expense new or used equipment in year of purchase.Cannot exceed the taxable income derived from the business.Cannot create a loss.
Section 179-Equipment Expensing
I.R.C. § 179 deduction was $510,000 with $2,030,000 phase-out limit ($1 for $1) in 2017.For 2018, has expanded to $1 million with a $2.5 million dollar phase-out limit ($1 for $1) .Will be indexed for inflation for future years.Provisions are not set to expire.
Interest Expense Limitation
Taxpayers with 3-year average gross receipts over $25 million are subject to interest deduction limits: Limited to 30% of adjusted taxable income
Can elect out, but must then use ADS on property in 10-year or greater MACRS life.
Excessive Depreciation Concerns
This increase in the rate of depreciation for many farm assets, combined with the shorter MACRS recovery class for new farm equipment and machinery, may generate more depreciation than is needed by some taxpayers.
The taxpayer can elect to use the SL method of depreciation and now may also elect to use the 150% method. Both elections are made on a class-by-class basis each year. To further reduce the amount of depreciation, the taxpayer may elect to use the alternative depreciation system (ADS), which calculates depreciation using the SL method and lengthens the recovery period.
Like Kind Exchanges
No Like Kind Exchange for Personal Property
§1031 now only applies to real property (land) under the TCJA. Farm equipment and breeding heifers not eligible.
Equipment trade-ins are now immediate (in the year) taxable events.
Most likely result will be taxable gain. Offset is increased basis for depreciation.
Amos Buys Tractor Under Old Rules
2017New Tractor Cost- $397,000Tractor for Trade In- $112,000 Reduced Cash Amount- $285,000 Old Tractor Basis- $61,262So Basis for depreciation Is- $346,262No gain was recognized on disposition of tractor.
Amos Buys Tractor Under New Rules
2018Tractor for Trade In- $112,000 Old Tractor Basis- $61,262Taxable Gain $50,738 (Part III, Form 4797)
New Tractor Cost- $397,000New Basis for depreciation Is- $397,000
So what does Amos Do?
Simply think of it as a sale of the used piece of equipment and the purchase of the new piece of equipment.
Elect to take offset the taxable gain of $50,738 by using I.R.C. § 179 (provided he is under investment limit of $2,500,000.) or use bonus depreciation.
Cautions/Observations
Some taxpayers may not always be able to immediately offset the gain recognized by taxable exchanges.
May already have used the maximum $1,000,000 section 179 deduction or may have exceeded the $2,500,000 investment limit on qualifying purchases.
May not want to use bonus depreciation because it applies to the entire recovery class basis. This may create more than the optimal amount of depreciation expense.
Farm Loss Deduction Limits
Farm Net Operating Losses under TCJA
5-year carryback for farm losses eliminated. 2-year carryback for nonfarm losses eliminated.
Farms still have this option. Carryover loss deduction limited to 80%. Unlimited carryover. Farmers may elect out of 2-year carry back.
Cash Accounting
Cash Accounting
Expands who may use cash accounting. Can now use cash accounting if < $25 million in gross
receipts. Was <$5 million Impacts C Corps
Thank You!
David L. Marrison, Extension EducatorCoshocton County Extension
724 South 7th Street, Room 110Coshocton, Ohio 43812
Barry Ward
Act to provide for reconciliation pursuant to titles II and V of the concurrent resolution on the budget for
fiscal year 2018(AtPfRPtTIIaVotCRotBfFY2018)
Also known as the: “Tax Cuts and Jobs Act” (TCJA)
Signed into law on December 22nd, 2017
New Tax Rate C-CorporationsOne of the cornerstones of the Tax Cuts and Jobs Act
(TCJA) was to reduce tax rate for C-Corporations.
Was permanently reduced to a flat 21%.
Corporate Tax – Pre TCJA
C-corporation Rate through December 31, 2017
New Tax Rate C-CorporationsMedium to larger C-Corps benefitSmaller C-Corps don’t benefitA C-Corp with net income less than $96,500 was better off
with the old C-Corp rates (in terms of rates only!)
Corporate AMT is repealed for tax years beginning after Dec 31, 2017.
New IRC Section 199A Deduction for Qualified Business Income
A deduction in the amount of 20% is allowed for “pass through entities” - sole proprietorships, partnerships, and S corporations (LLCs are included) from Qualified Business Income from what is termed a “Qualified Trade or Business”
This deduction allows for continued tax neutrality between business entity types
New IRC Section 199A Deduction
Determine Qualified Business Income (QBI).Includes Schedule C, F, E, Form 4797 recapture, Form 4835There are a number of definitions, thresholds, and limitations
that apply to this deduction.Generally the 199A deduction for QBI is the lesser of:20% of combined QBI or 20% of taxable income minus net capital gain-qualified cooperative
dividends.
New IRC Section 199A Deduction for Qualified Business Income
Also known as (AKA):199A Deduction for Pass Through Entities199A DeductionBusiness DeductionPass-through Entity DeductionPass-through Business DeductionQBI Deduction
Definitions for QBI Deduction
Qualified Business Income (QBI) - is the net amount of qualified items of income, gain, deduction, and loss with respect to any qualified trade or business of the taxpayer.
Trade or Business- taxpayer must be involved in the activity with continuity and regularity and the taxpayer’s primary purpose for engaging in the activity must be for income or profit.
See: I.R.C. §162. & Commissioner v. Groetzinger
QBI Deduction
The QBI Deduction is claimed on the individual’s tax returns whether an individual itemize deductions (Sch A) or does not itemize.This deduction reduces taxable income and is 20% of “qualifying business income (or 20% of taxable ordinary income).”
QBI Deduction
Example: You make $100,000 in a pass-through business but with the new standard deduction ($24,000) your taxable income is $76,000 (assume all income is ordinary)
Your deduction is the lesser of: 20% of $100,000 = $20,000 20% of $76,000 = $15,200
Deduction is $15,200
QBI Deduction Married Filing JointlyNo Dependents - No Wage IncomeFACTS FROM 1040 & Sch. 1
W-2 WAGES $0
SCH F $100K
SCH D (THIS ALWAYS GETS DEDUCTED!!!)
SCH C
SCH E (Front & Back Page)
1120S NET, 1065 NET, GUARANTEED PAYMENTS, 1041
AGI $100K
BACK PAGE 1040
AGI $100K
STD DED/ITEMIZE $24K
NET TAXABLE INC $76K
QBI DEDUCTION $15,200
TAXABLE INCOME $60,800
QBI Deduction: $100K X 20% = $20,000QBI Deduction: $76K X 20% = $15,200
QBI = LESSER OF: $15,200
QBI Deduction Married Filing JointlyNo Dependents - Wage IncomeFACTS FROM 1040 & Sch. 1
W-2 WAGES $24K
SCH F $100K
SCH D (THIS ALWAYS GETS DEDUCTED!!!)
SCH C
SCH E (Front & Back Page)
1120S NET, 1065 NET, GUARANTEED PAYMENTS, 1041
AGI $124K
BACK PAGE 1040
AGI $124K
STD DED/ITEMIZE $24K
NET TAXABLE INC $100K
QBI DEDUCTION $20,000
TAXABLE INCOME $80,000
QBI Deduction: $100K X 20% = $20,000QBI Deduction: $100K X 20% = $20,000
QBI = LESSER OF: $20,000
QBI Deduction – LimitationsSpecified Service Trade or Business
Specified Service Trade or Business (SSTB):A specified service trade or business such as one that performs services
in the health, law, consulting, athletics, financial services, brokerage services, accounting, or any trade or business where the principal asset is the reputation or skill of one or more of its employees or owners.
Full 20% QBI Deduction if these businesses are under the bottom of the limitation phase-in range $157,500 Single or $315,000 MFJ
No deduction if these business have Qualified Business Income greater than $207,000 Single or $415,000 MFJ (top of the phase-in range)
Limited deductions in the phase-in ranges $157-207K Single $315-415K MFJ
QBI Deduction – Limitations
For individuals with taxable income of less than $157,500 for single filers and $315,000 for joint filers. The deductible amount for EACH qualified trade or
business is 20% of the taxpayers qualified business income (QBI)
Taxable income above these amounts results in “limitation phase-ins”
QBI Deduction - Limitations
High Income Taxpayers Need Wages and/or Property to qualify For individuals with taxable income of more than $157,500 for
single filers and $315,000 for joint filers. Limitation Phase-in amounts: $50,000 for single filers and $100,000 for
joint filers Limitation Phase-in range for single filers: $157,000 - $207,000 Limitation Phase-in range for joint filers: $315,000 - $415,000
QBI Deduction – Limitations
Full 20% Deduction Wage Limitation Phase-in Range
$0$157,500$315,000
Full Wage Limitation Applies
$207,500$415,000
$157,500$315,000
$207,500$415,000
QBI Deduction – Limitations - SSTBs
Full 20% Deduction Wage Limitation Phase-in Range
$0$157,500$315,00
No QBI Deduction Allowed
$207,500$415,000
$157,500$315,000
$207,500$415,000
QBI - Limitations
Once filers reach the top of the limitation phase-in range ($207,500 for single filers and $415,000 for joint filers) the calculations are simple (relatively):
The deduction is the greater of: 50% of the W-2 wages paid by the business or The sum of 25% of the W-2 wages paid plus 2.5% of the
depreciable property.
QBI – Depreciable Property
What is the depreciable property and how to calculate: Tangible property, subject to depreciation (meaning inventory
doesn't count), which is held by the business at the end of the year and is used -- at ANY point in the year -- in the production of QBI.
The depreciable period starts on the date the property is placed in service and ends on the LATER OF: 10 years OR the last day of the last full year in the asset's "regular"
(not ADS) depreciation period.
QBI - Depreciable Property
To illustrate, assume Ohio Farm purchases a piece of machinery on November 18, 2018 for 100,000. The machinery is used in the business, and is depreciated over 5 years. Even though the depreciable life of the asset is only 5 years, the owners of Ohio Farm will be able to take the unadjusted basis of $100,000 into consideration for purposes of this second limitation for ten full years, from 2018-2027, because the qualifying period runs for the LONGER of the useful life (5 years) OR 10 years.
QBI - Depreciable Property The basis taken into consideration is "unadjusted basis," meaning it is
NOT reduced by any depreciation deductions. In fact, Section 199A(b)(2)(B)(ii) requires that you take into consideration the basis of the property "immediately after acquisition."
Any asset that was fully depreciated prior to 2018, unless it was placed in service after 2008, will not count towards basis.
Just as with W-2 wages, a shareholder or partner may only take into consideration for purposes of applying the limitation 2.5% his or her allocable share of the basis of the property. So if the total basis of S corporation property is $1,000,000 and you are a 20% shareholder, your basis limitation is $1,000,000 * 20% * 2.5% = $5,000.
QBI – Limitation Calculation
For example: You have $1,000,000 of qualified business income and you’re potentially entitled to a $200,000 deductionbut you exceed the threshold.
Your business’s wages equal $300,000 and you hold $1 million in depreciable property: Your deduction is the greater of: Wage: $300,000 x 50% = $150,000 Wage/Property Combo:$300,000 x 25% + $1mil x 2.5% = $100,000
Qualified Business Losses & QBI Worksheet
Qualified Business Losses (QBL) are carried over to subsequent years to offset QBI
Domestic Production Activities Deduction (DPAD) Repealed
The deduction under IRC Section 199 known as the Domestic Production Activities Deduction (DPAD) is repealed effective January 1, 2018.
This deduction was beneficial for Cooperatives and farms with employees earning W-2 wages.
Grain Glitch “Fixed” (Cooperative Glitch)
Consolidated Appropriations Act 2018 signed on March 23, 2018
The 20-percent deduction calculated based upon their gross sales was eliminated and replaced with a hybrid Section 199A deduction
Grain sales made prior to March 23 to Coops do not qualify under the temporary provision
Sales to Cooperatives
Step 1: First, patrons calculate the 20 percent 199A QBI deduction that would apply if they had sold the commodity to a non-cooperative. But they don’t stop there.
Step 2: The patron must then subtract from that initial 199A deduction amount whichever of the following is smaller: 9 percent of net income attributable to cooperative sale(s) OR 50 percent of W-2 wages they paid to earn that income from the cooperative
Step 3: Add back in cooperative's qualified production activities income (QPAI) attributable to that patron's sales.
Allocating the Deduction to Patrons
Allocate the coop’s deduction to patrons based on value of business w/ coopSales to coops may result in a net QBI Deduction: Greater than 20% if the farmer taxpayer pays no W2 wages and coop passes
through all or a large portion of the allocable QBI Equal to 20% if farmer taxpayer pays enough W2 wages to fully limit their coop
sales QBI deduction to 11% and the coop passes through all allocable QBI Less than 20% if farmer taxpayer pays enough W2 wages to fully limit their
coop sales QBI to 11% and the coop passes through less than the allocable QBI
QBI Deduction Coop PatronNo Wages Paid
Pat sold grain through coop$230K PURPIM, $20K patronage dividend$200K expenses – no wages$50K QBIQBI Deduction is $10K (20%) reduced by lesser of ($50K x 9% = $4,500 or $0 x 50% = $0)….so $10K
QBI Deduction Coop Patronwith additional Pass-Through Deduction
Same fact pattern as previous except…Pat also got $2,500 deduction from coopQBI deduction is $12,500 ($10,000 + $2,500)
QBI Deduction Coop Patronwith Wages Paid
Same fact pattern as first example except….Pat paid $25,000 W-2 wagesQBI deduction is $5,500 ($10K reduced by lesser of $4,500 or $12,500)
Sales to Both- Need to Segregate Income/Expenses
Sales to Non-Cooperatives
Sales to Cooperatives
Tracking and Calculating Coop Sales and Expenses
Track expenses (including labor, machinery expenses, etc.) per field and allocate to those bushels sold to cooperatives
Prorate total expenses from Schedule F on a per bushel/per cwt basis
There may be incentive to increase NFI on coop sales vs non-coop sales depending on W-2 wages paid and the portion of QBI passes to patrons
Farm Lease Income and QBI Deduction
Farm lease/rental income qualifies for the QBI deduction if conducted: For income/profit With continuity and regularityMay be QBI even if: Not subject to SE tax Passive activity
Crop share landlords filing a Schedule F are eligible Crop share landlords filing Form 4835 may qualify (if they are
materially participating they likely will) Landlords will likely have to pass as a trade or business according
to IRC Section 162 Cash rent landlords filing a Schedule E may or may not qualify
pending final regs Landlords will likely have to pass as a trade or business according
to IRC Section 162
Farm Lease Income and QBI Deduction
What Do You Think?
Landowner who completely turns over management of the land to an agent, such as a professional farm management company, and does not otherwise materially participate in the farming operation, does not have SE income from renting land for agricultural use?
A triple net lease arrangement, where the tenant pays the taxes, insurance, and maintenance, may not give rise to material participation, and it may not qualify for the QBI deduction.
What minimum activity will qualify a cash rent income as QBI?
Farms with Multiple Entities: Proposed regulations indicate that common ownership of
business entities allows the farmer to combine the rent income with the farm income – an advantage
Section 1231 Capital Gain Income: Will not qualify as QBI if the gain is treated as a capital gain –
likely not good for dairy producers
Farm Lease Income and QBI Deduction
Conservation Reserve Program Payments
CRP payments quality for QBI if is a regular activity and for profit
Subject to SE tax if actively engaged (unless receiving social security)
8th Circuit – not SE income So Outside 8th – Yes QBI,
Inside 8th – No QBI?pp. 318-19
QBI Deduction
The QBI deduction will offset income tax liability and AMT however…
It will not reduce self-employment income or net investment income
QBI Deduction
Things to remember if nothing else….
The very large majority of farmers will be eligible for the entire 20% deduction!Qualified Business Income from sales to cooperatives will need to be tracked separatelyCash rent income to cash rent landlords may or may not qualify
QBI Deduction – Ohio Tax Ramifiactions
Ohio bases individual tax calculations on adjusted gross income. This deduction is taken after the adjusted gross income calculation and therefore can not be claimed for Ohio taxable income calculations.Ohio does have a separate “Business Income Tax Deduction”
Business Meals Deduction
The TCJA reduces the deduction for meals provided for the convenience of the employer to 50 percent through 2025 (was 100%)
After 2025, the deduction is eliminated fully
Farmer Tax Strategy
Entity Choice Which is best: Sole-proprietor, partnership, S-corp, C-corp Multiple entities
Plan for some income to take advantage of QBID Zeroing out income may not be a planning goal
Avoid NOLs if possible Conversion out of a C-Corp - lower penalty Avoid hobby farm filing
Gross sales – cost of goods sold Avoid investment ownership of timber
Farmer Tax Strategy
Some W-2 wage income will allow farmer to maximize the QBI Deduction
Charitable giving One possible method for farmers to contribute charitably is to gift
commodities to the charitable organization– escapes tax and avoids the limits due to new higher standard deductions
Bunching personal deductions
Chris Bruynis: bruynis.1@osu,eduDavid Marrison: [email protected] Ward: [email protected]
