By Brian E. Ravencraft, CPA, CGMA, Partner at Holbrook & Manter, CPAs
As you prepare for the upcoming tax season, now is a good time to review the lessons learned from last year’s first exposure to the provisions of the Tax Cuts and Jobs Act (TCJA). Here are seven end-of-year steps that agricultural owners in closely held businesses should take now to prepare.
- Maximize pass through deductions
One of the most significant provisions of tax reform for sole proprietorships, partnerships, and S corporations is the qualified business income (QBI) deduction, also known as the section 199A deduction. This allows business owners to deduct up to 20% of pass-through business income, and it also provides for a 20% reduction of certain types of rental income.
But, as many taxpayers discovered last year, the deduction is subject to some complex limitations. If you have not done so already, you should review how your business is structured and how profits are distributed to see if there are changes you could make that would apply this deduction more effectively.
The limitations included in the TCJA definitely require discussion and analysis. However, here is a high level explanation. Taxpayers that have taxable income less than the income threshold limit have a simpler computation than those that do not — these taxpayers multiply their QBI by 20%. As long as that amount does not exceed 20% of their ordinary income on their tax return, that is their deduction. The New Section 199A Deduction is claimed above taxable income.
The taxable income threshold begins at $157,500 for individuals ($315,000 for married filing jointly taxpayers) with the deduction vanishing at $207,500 for individuals ($415,000 for married filing jointly taxpayers).
When taxpayers exceed the income thresholds or their ordinary income amount, and have potentially other complicated activities, additional limitations apply relating to wages, co-op sales, and qualified property.
- Re-evaluate depreciation strategies
Another important year-end review involves how the depreciation of capital assets is handled, particularly in view of the new tax law’s changes to Section 179 of the tax code and its expansion of bonus depreciation. Deciding which approach to take is not always a simple decision.
In addition to different caps and general limitations, the two approaches also impose different limits on vehicles and certain types of equipment, as well as on rental properties and property improvements. Also note that bonus depreciation can be used to create a net loss for the year, while Section 179 deductions cannot. Because of these complexities — and many others — you should consider longer-term impact to the P&L when evaluating which method is the most beneficial to your farming business.
- Review entertainment and meal expenses
New limits on the deductibility of business entertainment expenses and meals caused considerable confusion during the 2018 tax cycle. With the benefit of hindsight, now is the time to review your company’s handling of these expenses.
- Crop insurance deferral considerations
Typically, most farmers are cash basis taxpayers and proceeds from the destruction or damage of crops is included in income in the year of receipt; however, federal law allows certain insurance proceeds to be deferred one year, if certain requirement are met.
Under a special provision, a farmer may elect to include crop insurance and disaster in income in the taxable year after the year of the crop loss if it’s the farmer’s practice to report income from the sale of the crop in a later year. When the claim is related to crop loss, then the claim can be deferred if:
- The farmer uses cash method of accounting,
- The claim is received in the year of loss (if received in the next year, you cannot defer),
- The loss is from damage/destruction to crops or the inability to plant crops, and
- The farmer’s normal business practice is to sell more than 50%of the crop in the year following the harvest. (The possible crop insurance deferral is the aggregate of all crops, even if one crop such as soybeans is normally sold at harvest, and corn is usually sold the following year).
The fourth rule is the one that trips up most farmers. If this is the case, you will want to work with your crop insurance company and make sure the claim is paid after the end of the year (assuming from a tax planning perspective the maneuver makes sense).
- Check for state and local tax conformity
State and local compliance can be especially challenging if your farm operations expanded into a new jurisdiction during the year. Some states’ tax codes mirror the federal code while others differ drastically.
- Update employment records
The end of the year is a good time to make sure employment records are up to date. Verify you have current addresses and other information for Forms 1099 and W-2. And keep in mind a new Form W-4 will be coming out soon.
- Review independent contractors’ status
Improperly categorizing workers as independent contractors rather than employees is a hot button issue for the IRS. So it’s wise to review the status of all workers annually.
As always, reach out if you have questions. I am always happy to help.
Brian E. Ravencraft, CPA, CGMA is a Principal with Holbrook & Manter, CPAs. Brian has been with Holbrook & Manter since 1995, primarily focusing on the areas of Tax Consulting and Management Advisory Services within several firm service areas, focusing on agri-business and closely held businesses and their owners. Holbrook & Manter is a professional services firm founded in 1919 and we are unique in that we offer the resources of a large firm without compromising the focused and responsive personal attention that each client deserves. You can reach Brian through www.HolbrookManter.com