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Katie Finnegan-Larson, Author at Ketel Thorstenson, LLP

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October 1, 20180

The Tax Cuts and Jobs Act has several changes for farmers and ranchers.

  • Like-kind exchanges, deferral of gain on sale, can only be used for Real Property. Equipment like-kind exchanges are reported as a sale and purchase (2 separate transactions).
    • Equipment trade-in value is the sale price of the equipment. Replacement equipment is valued at the selling price before the trade-in is considered.
  • Depreciation rules have changed.
    • New and used equipment purchased in the tax year qualifies for 100% first year bonus depreciation (old rule was new purchases only)
    • If the bonus is not used, Sec 179 is still available for new and used equipment. The limit is $1 million with the phase-out threshold at $2.5 million.
    • Double declining balance depreciation is available for 3, 5, 7 and 10 year property with the repeal of the 150% declining balance depreciation method.
    • The depreciable life for new equipment is 5 years (old rule was 7 years).
    • The depreciable life for used equipment remains at 7 years.
  • Real Estate taxes allocable to the business are not subject to the $10,000 limitation, the limitation applies to personal property tax only, deducted on the Schedule A as an itemized deduction.
  • Business interest is fully deductible as long as gross receipts are less than $25 million.
  • Net operating losses (NOL) have a couple of changes starting after December 31, 2017 and before 2026:
    • NOL generated can carryback up to $500,000 (MFJ) or $250,000 (single).
    • NOL carryback is for 2 years only (was 5 years) for farm and ranch only.
    • NOL carryforward is indefinite (was limited to 20 years).
    • NOL carryforward can only offset 80% of income (prior rules allowed 100%).
  • Qualified Business Income Deduction (QBID):
    • The flow-through deduction from cooperatives (formally DPAD), will still be deductible by the individual.
    • The QBID is a deduction against taxable income but does not affect self-employment taxes.
    • The Qualified Business income does not include capital gains (an example would be sale of breeding stock).
    • The simplest explanation for the QBID is 20% of Qualified Business Income (QBI).
      • This method is used when taxable income for a single taxpayer is below $157,500 and married taxpayer is below $315,000.
    • If taxable income is above the thresholds, the initial QBID for each of the taxpayer’s trades or businesses is the lesser of 20% of QBI, or the greater of 50% of W-2 wages, not including commodity wages, or 25% of W-2 wages plus 2.5% of qualified property.
    • Rental income will qualify for the QBI deduction if the property is rented to a commonly controlled trade or business.

The Tax Cuts and Jobs Act has many tax saving features.  We will continue to inform you as the proposed regulations get defined and made permanent.  We would encourage you to visit the KTLLP Tax Team for your tax planning needs before the end of the year.