How Does the 2017 Tax Act Affect the Agriculture Industry?

How Does the 2017 Tax Act Affect the Agriculture Industry?

This article aims to explain how some of the new tax rules in the Tax Cuts and Jobs Act (the “2017 Tax Act”) affect the agriculture industry, as well as provide some tax planning considerations in light of the new rules.

Prior Farmer and Cooperative Deductions

Under prior law, to incentivize domestic production, Congress allowed domestic producers to deduct a percentage of their net income from certain U.S. production activity under Internal Revenue Code (“Code”) Section 199, which is generally known as the Domestic Production Activities Deduction (the “DPAD”). The DPAD was capped at 50 percent of the wages paid with respect to such domestic production activities.

Code section 199(d)(3) allowed agricultural cooperatives to compute the DPAD at the cooperative level and pass the deduction through to their farmer patrons. In other words, if a patron sold products to a cooperative, then the patron would still be able to benefit from the Code section 199 deduction passed through to such patron by the cooperative even if no wages were paid by the patron. However, this benefit was still subject to the wage limitation at the cooperative level wherein the patron would not get the full deduction if the cooperative did not make sufficient W-2 payments to its employees.

New Code Section 199A

The 2017 Tax Act repealed Code section 199 for taxable years beginning after December 31, 2017. In its place, there is a new Code section, 199A, which allows individual taxpayers to deduct up to 20 percent of “qualified business income” from a partnership, S corporation, or sole proprietorship. However, the 199A deduction is also capped by a wage limitation unless the taxpayer’s income is below the threshold amount. The threshold amount is $157,500 for single filers or $315,000 for joint filers in 2018. Thus, farmers with taxable income above the threshold amount may not claim the full 199A deduction absent the payment of sufficient W-2 wages. This tax provision will sunset on December 31, 2025 unless extended by Congress.

The Grain Glitch

Code section 199A was amended three months after its enactment because it resulted in an unintended incentive for farmers, called the “Grain Glitch,” to sell their agricultural products through cooperatives instead of selling those products themselves. The root of the problem was caused by qualified cooperative dividends. Pass-through business owners could take a deduction for 20 percent of qualified cooperative dividends received from their cooperatives, calculated on a gross basis and subject to fewer limitations, in addition to the pass-through business deduction described above. This unintended tax incentive was corrected by the Consolidated Appropriations Act, which was signed into law by President Trump on March 23, 2018 and made retroactive to January 1, 2018.

Excise Tax Relief for Breweries, Wineries, and Distilleries

The 2017 Tax Act also provides a temporary reduction in alcohol beverage excise taxes for U.S. brewers, winemakers, distillers, and beverage importers under Part IX, Subpart A, the Craft Beverage Modernization and Tax Reform (CBMTR). The CBMTR section of the new law is scheduled to be valid until December 31, 2019. The key provisions are as follows:

How Does the 2017 Tax Act Affect the Agriculture Industry?

Expensing Provisions

The 2017 Tax Act amends the existing expensing provisions, which overall encourage taxpayers to make capital investments. This section aims to explain the changes made to the expensing provisions. However, readers should note that many states do not conform exactly to the federal expensing provisions.

1. Section 168(k) Expensing

The 2017 Tax Act provides a temporary bonus depreciation rule for taxpayers to immediately deduct costs for “qualified property” (i.e., tangible property with a recovery period of 20 years or less) acquired and placed in service after September 27, 2017 and before January 1, 2023. This favorable rule not only applies to the purchase of brand new property, but also to the purchase of used property, as long as it has not been previously used by the taxpayer or a related party. The purpose is to encourage capital investments by permitting taxpayers to write off their investments immediately instead of over a statutory basis recovery period (commonly known as “depreciation”) under prior law.

2. Enhanced Section 179 Expensing

Under prior law, Congress also provided a 179 expensing provision which allows taxpayers to deduct up to $500k of the cost of certain qualifying tangible property instead of depreciating it. The TCJA increases the 179 expensing limit from $500k to $1 million per year, with the phase out increased from $2 million to $2.5 million (indexed to inflation). It is worth noting that this amendment is permanent and is effective for property placed in service in taxable years beginning after December 31, 2017.

3. Section 180 Expensing

Moreover, the 2017 Act allows farmers to elect to immediately expense costs paid or incurred for the purchase of fertilizer, lime, ground limestone, marl, or other materials to enrich, neutralize, or condition land used in farming, or for the application of such materials to such land, rather than to capitalize the expense and depreciate it over the term of its useful life. The election is for one year only, but once such an election is made, it cannot be revoked without the consent of the IRS.

Like-Kind Exchanges

Under prior law, Code section 1031 allowed a taxpayer to exchange property, including tangible personal property, used in a trade or business or held for investment for “like-kind” property without currently recognizing gain or loss. The 2017 Tax Act amends section 1031 to limit the “like-kind” exchange rule to apply only to real property. This new rule will be effective in taxable years beginning after December 31, 2017. Readers who previously took advantage of the like-kind exchange rule for tangible personal property should take note of this new change.

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Allison Kroeker
akroeker@rroyselaw.com

Allison Kroeker joined the firm after receiving her LL.M. in Taxation. Her areas of focus within the tax practice include business structure planning, corporate transactions, deferred compensation, and income tax compliance. She also writes many of Royse Law Firm’s articles on tax procedure and policy.
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