By Curtis Sawyer
Tax season is coming up and the new changes could have an effect on your agribusiness and tax planning. The goals of the new tax law were simplification, fairness and a move towards a flatter tax system. American businesses are looking to be more competitive overseas and wanted the reduced tax rates. The final tally on the overall cost of the bill includes collections from increased taxes spurred on by this future economic growth.
There is a lot of give and take in these various new laws. Many of the provisions will benefit organizations that are buying new assets or hiring new people. Here is a high-level overview of some of the changes relevant to agribusiness.
Corporate Tax Rate and C Corp Benefits
The first change is that the corporate tax rate was changed to a permanent, flat 21% rate, down from 35% and there’s the ability to deduct your state taxes. This change might encourage you to look at your business entity as it makes C corporations potentially more beneficial than they would have been a year ago. That’s because before the tax reform, the first $50,000 of profits were taxed at 15% with a graduated rate to 35%. Since there is now a flat rate of 21% for business income, a C corporation may be something to consider.
Section 199A: The Qualified Business Income Deduction
The next change is to the Section 199A or Qualified Business Income Deduction. This is a new 20% deduction of the qualified business income reported by taxpayers who file a Schedule F, C or E. Owners of pass-through entities such as partnerships, LLCs and S corporations can also take advantage of the new deduction. For farmers, this replaces the Domestic Production Activities Deduction (DPAD), which was 9% of the operating farm income deduction. C corporations do not qualify for this because they already have the 21% tax rate.
This change isn’t as simple as it seems on paper. This deduction will expire on December 31, 2025 and this deduction is also taken on the individual tax return, not on your entity and it depends on your taxable income. The deduction is phased out at the married joint filing level of $315,000 and for individuals at $157,500 and will have additional limitations in order to qualify. Knowing what is considered Qualified Business Income can be a complicated discussion and depends on your particular business.
Increase in Depreciation Deductions
Section 179 amount went from $500,000 to $1 million with a phase out limitation now starting and $2.5 million of purchases and bonus depreciation is now allowed on both new and used assets based on the following schedule:
100% for property placed in service after 9/27/17 and before 1/1/2022
80% for property placed in service after 12/31/2021 and before 1/1/2024
60% for property placed in service after 12/31/2023 and before 1/1/2025
40% for property placed in service after 12/31/2024 and before 1/1/2026
20% for property placed in service after 12/31/2025 and before 1/1/2027
This change in bonus depreciation from just new assets to new and used assets is important for farming entities. A farm building is a 20-year asset and you can take bonus on anything with a life of 20 years or less. The most extreme example is a building that is either new or a building that you purchased is eligible for bonus depreciation. This change might allow farming businesses to allocate the cost of land purchases to buildings and improvements and elect bonus depreciation for quick recovery of the investment.
Planning Ahead with Aldrich Advisors
Our knowledge of the entire agri-business supply chain from grower to processor to retailer allows us to help our clients achieve their goals. Please contact Aldrich Advisors at 503-585-7774 if you’d like to review these opportunities or discuss other options for tax savings.