October 24, 2018
As year-end approaches, taxpayers and their advisers are in new territory. Last December, Congress passed the biggest set of changes to the tax law since 1986. Most of the changes from the Tax Cuts and Jobs Act have been in effect since the beginning of this year.
How all these changes will impact 2018 tax returns is still not entirely clear, but this month, we answer a few common questions as farmers turn from their fields to focus on tax and business planning.
I’ve heard there are a lot of tax changes in 2018, could you give me a quick synopsis of some of the biggest changes that apply to farmers? The changes would entail the following:
• Most individual income tax rates are lower through 2025, meaning most farmers will have their income taxed at a modestly lower rate. For example, in many cases, income that was taxed at a 28% rate is now taxed at a 24% rate, and the highest marginal tax rate has been reduced from 39.6% to 37%.
• The standard deduction has been almost doubled through 2025, meaning married producers can deduct $24,000 as a standard deduction, singles can deduct $12,000, and many fewer taxpayers will itemize deductions.
• Farmers with children will see the child tax credit double from $1,000 to $2,000 per qualifying child under 17, and a new $500 credit is available for dependents above 16 years old. Many more taxpayers will be eligible for the new child tax credit because the income phase-out threshold for the credit has been increased from $110,000 to $400,000 for married couples. These changes are in place through 2025.
• The 100% deduction for meals provided to employees for the convenience of the employer has been decreased to 50% through 2025. After that, the deduction is eliminated.
• Farmers may deduct (at federal level) 100% of the cost of new or used equipment using bonus depreciation through 2022. This applies to property placed in service after September 27, 2017. The federal Section 179 deduction has been increased to $1,000,000. Iowa does not recognize bonus depreciation, and the 2018 Section 179 limit in Iowa is $70,000 for individuals and $25,000 for corporations.
• New machinery purchased in 2018 is now depreciated over five years instead of seven years. Farmers will also use a faster 200% declining balance method of depreciation for new or used equipment purchased in 2018.
• The corporate tax rate has been permanently changed from a graduated rate quickly climbing to a top rate of 35% to a flat rate of 21%. Although most corporations will see lower tax rates in 2018, C corporations may see a tax increase if their taxable income is below $80,000.
• The 9% Domestic Production Activities Deduction (DPAD) was repealed, and a new 20% deduction has been created for pass-through business owners and sole proprietors through 2025. Some adjustments to this credit are made for sales by patrons to agricultural and horticultural cooperatives. These co-ops may also pass through a deduction to these business owners that is very similar to the old DPAD.
• Farm net operating losses can now be carried back only two years instead of five years, and these losses can only offset up to 80% of taxable income.