The Tax Cuts and Jobs Act, as it is called, is creating a major reform in how both corporate and individual income taxes are treated in the U.S. The act was signed just before Christmas and will be effective for income earned in 2018. The Tax Cuts and Jobs Act will reform the individual income tax code by lowering tax rates on wages, investment and business income; broadening the tax base; and simplifying the tax code. The plan will lower the corporate income tax rate to 21 percent and move the U.S. from a worldwide, to a territorial system of taxation.
The plan’s main aspects:
- The tax brackets for income taxes shift downward for most filers. This includes the top marginal rate from 39.6 percent to 37 percent. We retain the current one-bracket structure, but the bracket widths have been modified.
- The standard deduction nearly doubles from $6,500 to $12,000 for single filers and the married deduction moves to $24,000.
- If you have children you will be eligible for the expanded child tax credit. Most families will be able to claim up to $2,000 per child and will be able to get $1,400 per child back as a refund.
- In 2019 the individual healthcare mandate will sunset. Thus, Americans will no longer be legally obligated to purchase healthcare.
How does the tax plan affect agriculture?
One of the major aspects of the tax plan, designed to help small businesses like farms, comes in the form of the deduction for “pass through” businesses.
The majority of farms are governed as pass-through businesses, as they are LLCs, partnerships and sole proprietorships.
The tax bill includes a 20 percent deduction of the qualified business income. Previously, the income from these businesses pass through to the tax returns of the owners and is taxed at the rate that the owners faced through their own adjusted gross income. Thus, income will be deducted 20 percent before it carries through to the owner’s tax return.
For example: If an LLC earned $100,000 net profit, only $80,000 will be passed through to the owner’s tax return, to be taxed at their own personal tax bracket.
Farms tend to have a large amount of assets that create a challenge when trying to transfer them from generation to generation. The new tax bill will increase the estate tax exemption from $5.49 million to $11 million and double that amount for married couples.
One of the other major items in the bill is the expansion of the Section 179 deduction. For reference, the Section 179 of the IRS tax code allows businesses to deduct the full purchase price of qualifying equipment, such as a tractor or other piece of farm machinery, purchased or financed during the tax year.
This means that if you buy (or lease) a piece of qualifying equipment, you can deduct the full purchase price from your gross income. The new bill expands the limit from $510,000 to $1 million.
This has a major impact on the income tax base for most farmers as they generally tend to make large capital purchases as part of their normal business operations. The ability to take the full depreciation in the first year encourages year after year growth and helps drastically reduce the income tax burden for farmers.
The new tax bill leaves in place the provision that allows farmers to deduct property taxes on agricultural land in production. Furthermore, the bill allows tax payers to take a personal property tax deduction and either an income tax or sales tax deduction, with a combined limit of $10,000.
The Tax Cuts and Jobs Act will go into effect in 2018 and the provisions will affect income earned in the 2018 tax year. Farmers will see the most significant impact from the new bill on their ability to take a larger deduction for capital assets purchased and through the 20 percent deduction directly off the top of their income from their business activities.
These will have a major impact on reducing the amount of income tax that farmers face.