Updated: Jul 9, 2020
By Kelly Nuckolls
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The Tax Cuts and Jobs Act, the new federal tax law passed at the end of 2017, has several changes that farmers should consider discussing with their accountant or attorney at the start of the New Year. While there are a number of changes in the new federal tax law, this post will highlight only a few specific changes that farm operations should pay attention to, including the new corporate tax rates, deductions for property taxes, and changes to federal estate tax law. For more information and details on other new federal tax law changes for 2018, you should consult your attorney or accountant.
Farm business entities that are C-corporations or LLCs that are taxed at the corporate rate should consider the new federal tax law’s changes to the corporate tax rate. The new tax bill lowered the tax rates for most businesses, except for smaller C-corporations and certain LLCs. Depending on how they are structured, LLCs are taxed as either a corporation, partnership, or with an individual’s tax return. From now on, all corporations will be taxed at 21 percent. Before the new federal tax law, corporations with a taxable income of less than $50,000 were taxed at 15 percent. Farm operations taxed as corporations could see a significant increase in their tax rate if their taxable income is less than $50,000. These businesses may save money on their taxes if they reshape how their entity is structured. For example, an LLC could be restructured to meet the Internal Revenue Service (IRS) requirements to be taxed as a partnership instead of a corporation. If you have an LLC that has been taxed as a corporation in the past, it might be useful to discuss with your attorney or accountant how you can restructure your LLC to be taxed as a partnership. Also, there are also other business entities, such as S-corporations and partnerships that are not taxed at the corporate rate. While this may only impact a small number of farms, it is important to determine if the new federal corporate tax rate will significantly increase your federal income taxes.
If you were able to deduct your property taxes in past tax years, you may want to check if you will still be able to use this deduction to reduce your federal income taxes. The new federal tax law capped the amount of state and local taxes (i.e. income, sales, and property taxes) deduction at $10,000. This $10,000 cap does not apply, however, if local property taxes are paid on property that is part of a business that files a Schedule C, Schedule E, or Schedule F (the form farms usually use for reporting farm business income and expenses). If the property taxes are part of this “business expense,” the full amount of the property tax, even if it is over $10,000, can still be deducted and will help to reduce your federal income taxes. If some of the property tax you pay includes property for personal use, not business purposes, that personal use percentage of your property taxes would not qualify as a business expense. In this case, the percentage of property taxes going toward personal property would only be deductible in combination with all other state and local taxes, such as income taxes, up to the $10,000 cap. Farmers may want to double check that most of their paid property tax qualifies as a business expense that can be deducted on one of these forms. There are limitations on what activities qualify as business expenses, and what types of business operations can report their business income and expenses on a Schedule C, Schedule E, or Schedule F form.
The new federal tax law might also mean your farm estate and succession plans will no longer need to focus on reducing your estate for estate tax purposes. An estate pays a federal estate tax if the estate’s worth is over a certain amount. The federal estate tax in the past might have caused financial concerns for the next generation of farmers, with the trigger amounts for paying federal estate taxes set at around $5 million per individual and almost $11 million for married couples. Now, the new federal tax bill has doubled what an estate must be worth before it will be required to pay federal estate taxes. For 2018, an unmarried individual’s estate must be worth $11.2 million, and $22.4 million for married couples before the estate is taxed. This amount will continue to increase with inflation, until 2025. In 2026, the federal estate tax trigger amount will be cut in half and will go back to around $5 million per person and $11 million for married couples. For now, most farm families can focus on other estate and succession planning issues, instead of estate tax issues.
The new federal estate tax trigger amounts could potentially impact states’ estate taxes as well. Some states have a state level estate tax if an estate is over a certain amount. In Delaware, starting in 2018, the estate tax has been eliminated, but Maryland farm families may still have to consider Maryland estate taxes as part of their estate plans. For 2018, Maryland estates valued at more than $4 million will be required to pay the state’s estate tax. In 2019, however, Maryland’s estate tax will change to follow federal law. Unless Maryland’s law changes this year, Maryland farm families will most likely be able to avoid concerns about state estate taxes beginning in 2019.
There are several other changes in the new federal tax law beyond what this post has discussed. Other topics you may want to discuss with your legal or financial professional include how the new federal tax law will change farm equipment depreciation and the time period for carrying back net operating losses to earn a tax rebate for previous tax years. Also, if you are considering changing or creating a business entity for your farm operation, the new federal tax law changes for “pass-through” business entities like S-corporation, partnerships, and some LLCs should also be discussed with an attorney or account because there are new tax rates and a new deduction that could potentially be a financial benefit for your farm business. Farmers should also note that some of the new federal tax law provisions expire in 2026, and should seek advice from their legal and financial professionals on creating the best business plan for before and after 2026, if federal law does not change again before then. An attorney or accountant might also have additional recommendations related to the changes in federal tax policy that could benefit your farm operation.