DICKINSON, N.D. — A sweeping new tax package, known as the Tax Cuts and Jobs Act of 2018, will benefit farmers and agricultural producers by expanding programs aimed at lowering tax burdens on the agriculture community.
The bill came to fruition after contentious debates in both the House and the Senate late last year. After votes of 227-205 in the House and 51-49 in the Senate, both along party lines, the bill was signed by President Donald Trump on Dec. 22, 2017.
The law will lower tax rates for individuals and corporations, among other things. According to The Wall Street Journal, it is "the biggest transformation of the U.S. tax code in more than 30 years."
The 2018 tax law, with all the new changes, has prompted North Dakota State University’s Agriculture Commission to advise farmers to begin tax planning before Jan. 1 to make the best use of the many benefits included in the bill.
“It is best to try to spread out income and expenses so producers don't have abnormally high or low income or expenses in any one year,” Ron Haugen, North Dakota State University Extension farm economist, said in a press release.
Unless otherwise noted, the changes -- bolded below -- are effective for tax years 2018 through 2025.
Tax rates have decreased for 2018
Speaking with Tabitha Talkington, tax manager at Brady Martz and Associates, the recent changes will benefit many farmers and agriculture producers in western North Dakota.
“Your tax bracket shows you the tax rate that you will pay for each portion of your income. This year we have an average 3 percent decrease in the tax brackets,” she said. “Moving into a lower-percentage bracket means more than just paying less overall, but having a lower percentage of your income within this tax system.”
Agricultural producers are now allowed to use 200 percent declining balance depreciation for 3-, 5-, 7- and 10-year property. 150 percent declining balance is still required for 15- and 20-year property.
“Prior to the Tax Cut and Job Act, agricultural producers had a slower depreciation than most businesses were using,” Talkington said. “Now ag producers are able to use the same 200 percent that other businesses use. It going to speed up asset purchase for farmers and ag producers.”
Assets can include biological assets such as goats, sheep, cows, buffalo, calves and fish, or can include essential farming equipment such as trucks, tractors, headers and combines.
For most new agricultural machinery and equipment (except grain bins), the recovery period has been reduced from seven to five years.
Talkington explained the recovery period as thus:
“Last year when a farmer bought a piece of equipment, let's say a tractor, it was depreciated over a seven-year life at 150 percent,” Talkington said. “This year, that same tractor they buy new is able to be depreciated over a five-year life at 200 percent -- so basically faster depreciation, which in turn will accelerate expenses, which sounds bad, but it’s great for farmers.”
Like-kind exchanges are now not allowed for personal property, but still are allowed for real property.
“Last year, that tractor you went and traded for a new tractor wasn’t recognized as a gain on the sale,” Talkington explained. “Now in 2018, you can still trade your tractor to the implement dealer, but the trade-in value that you are going to get has to be recognized as a gain or a loss based on what your basis is on the old tractor, and you would have to treat the new tractor as if you just purchased it.”
The Section 179 expense has increased. It generally allows producers to deduct up to $1,000,000 on new or used machinery or equipment purchased in the tax year. There is a dollar-for-dollar phase-out for purchases above $2,500,000.
“So, 179 is a section of the code that allows people to pick the amount of depreciation they want to take,” Talkington said. “Last year it was only $500,000 and this year it was increased to $1 million. That will allow farmers and ag producers to target where they want their income to be, rather than allowing it to fall into bonus.”
The additional 100 percent first-year bonus depreciation is in effect. It is now available for used as well as new property. It is equal to 100 percent of the adjusted basis after any Section 179 expensing.
“Basically, bonus is an eligibility that’s available to taxpayers. Last year it was only 50 percent, so if you bought something new -- and it had to be new -- the first 50 percent could be written off in the year of purchase and the other 50 percent would be spread over the life of the asset,” Talkington said. “In 2018, any purchase -- new or used -- is at 100 percent. So basically, you are not depreciating, you are direct expensing. If you went out and bought a tractor at $200,000, the full amount is eligible to be bonus first-year depreciation. That’s huge.”
Additional changes pertinent to the local area to note, according to NDSU’s release:
Income averaging can be used by producers to spread the tax liability to lower income tax brackets in the three previous years. This is done on Schedule J. North Dakota farmers who elect to use income averaging for federal purposes also may use Form ND 1FA (income averaging) for North Dakota income tax calculations.
Crop insurance proceeds and government crop disaster payments can be deferred to the next tax year if a producer is a cash-basis taxpayer and can show that normally income from damaged crops would be included in a tax year following the year of the damage.
A livestock income deferral is available for those who had a forced sale of livestock because of a weather-related disaster.
Prepay farm expenses. Feed, fertilizer, seed and similar expenses can be prepaid. Typically, discounts are received by paying for these expenses in the fall. Producers can deduct prepaid expenses that do not exceed 50 percent of their other deductible farm expenses.
Defer income to 2019. Crop and livestock sales can be deferred until the next year by using a deferred payment contract. Most grain elevators or livestock sale barns will defer sales until the next tax year. Producers should be aware that they are at risk if the business becomes insolvent before the check is received and cashed.
Purchase machinery or equipment. Machinery or equipment purchases can be made before the end of the year to get a depreciation or 179 expense deduction in 2018.
Contribute to a retirement plan such as a simplified employee pension plan, savings incentive match plan for employees or individual retirement account.
Any questions about these topics should be addressed with your tax professional or the IRS at 800-829-1040 or http://www.irs.gov. North Dakota income tax questions can be addressed to the North Dakota Tax Department at 877-328-7088 or http://www.nd.gov/tax/
Additional information on agricultural topics can be found in the Farmers Tax Guide, Publication 225, which can be obtained at any IRS office or ordered by calling 800-829-3676.