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New tax laws — Ag Outlook 2018
March 2, 2018

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By KAREN SCHWALLER

kschwaller@evertek.net

SPENCER - Certified Public Accountant Gary Peters stood before a large group of commodity producers at the Northwest Iowa Ag Outlook in Spencer to set the record straight concerning the new tax laws coming into play for 2018.

Peters, with Winther, Stave & Co., from Spencer, began with the new Section 199A, saying the new tax law wanted to give special treatment to pass-through entities (partnerships and S corporations), allowing them to deduct 20 percent of income. This includes farmers, business people and anyone who files a Schedule F or Schedule C.

"...so you figure your income, take 20 percent and deduct it," he said. "As long as you're under $315,000 of taxable income, that's all you need to know."

Peters added that the new tax law also eliminated the old Section 199's Domestic Activities Production Deduction (DPAD).

"The new tax law got rid of the section that allows (cooperatives) to do that," he said, adding that last-minute action by government representatives from North Dakota, South Dakota and Iowa gathered to make a new provision for Section 199A.

"It says a farmer not only gets 20 percent of their net income, just like all the others do, but (in addition) 20 percent of any sales business you conduct with a cooperative of which you are a member," said Peters. "You have to be a member of the co-op to get the patronage allocation for all the business you do. It's 20 percent of gross sales."

That will change things in a big way for farmers.

"That's going to wipe out your income," Peters said. "A farmer will not have income tax."

Peters said the new tax law will not effect social security/self-employment tax, and will "probably not" effect cash rent situations. Share crop arrangements have yet to be decided upon, while legislators determine if the activity rises to the level of them being a "business."

He said if a producer sells to a cooperative - and not to a Cargill-like facility, ethanol plant or a neighbor to use as feed - they receive a benefit.

"The legislators admit they screwed up," Peters said. "I feel bad when my clients come to me and ask who they should sell to, (but I say) sell to the co-op. That's against my better business judgment. Today you're not going to hurt yourself selling to the co-op. You may hurt yourself selling to anyone other than a co-op because you're not going to get that deduction."

Peters said the new tax law does not apply to seed corporations because they received a tax benefit when the corporate rate was reduced to 21 percent.

He said the new law also does not apply to livestock sales, but added that livestock producers will most likely begin forming their own cooperatives in order to continue forward.

"Old 199 applied only to ag co-ops. The new 199A applies to any co-op," said Peters. "Is it legal? Yes. Can a packing plant do it? Yes. Can Cargill do it? They're doing it - it's in place. They just haven't pulled the trigger."

Peters said the best chance of resolving this issue centers on March 23, when the budget bill will be voted upon with this attachment.

"If they don't get this done on March 23 you're going to see Cargill and all the big boys forming cooperatives ... Green Plains already has theirs in place in a couple of states and getting other applications done," he said. "You're going to see co-ops across the board. That's how they are going solve the problem."

Peters said a producer only needs to be a member of a cooperative before they sell their crop, with no minimum timeline in place.

Tax rates

Peters said individual tax rates were generally slightly lower, so if there is any taxable income request, it will be taxed at a lower rate.

Seed corporation rates were reduced to a flat rate of 21 percent, from the previous 35 percent maximum. Peters said the first $50,000 of income for seed corporations now get taxed at 21 percent, rather than the previous 15 percent and up.

"Will you get a tax cut on that first $50,000? No. You're paying 6 percent more," he said. "There will not be tax cuts for everybody."

He added the whole idea behind the new tax law was to take $1.5 trillion and give it back to corporations and individuals as a form of a tax cut.

"Everybody wants to know how big their tax cut will be, but they are so fact-specific that I can't tell them," said Peters. "But it seems like everybody is going to pay less."

Peters said the standard deduction for single filing last year was $6,500, and under the new tax law it will be $12,000; joint filers received a $13,000 deduction this past year, and that will increase to $24,000 under the new tax law.

The personal exemption of $4,150 per person has been eliminated.

"What they give on the standard deduction they take away in personal exemptions," Peters said.

Depreciation

Peters said the limitation in 2017 was $510,000, and it will nearly double to $1,000,000 in 2018 and beyond. That includes roofs and heating, ventilation and air conditioning units.

He said the bonus depreciation for 2017 was at 50 percent, and under the new law it will be 100 percent for assets acquired and placed in service after Sept. 27, 2017. This includes new or used items. The previous law only allowed this provision for new items.

"The only thing you can't write off is land and your house in the year you purchase it," said Peters.

He added a farmer can use bonus depreciation to create a net operating loss. He said net operating losses in 2017 and prior offset 100 percent of any income going forward or back.

Starting in 2018 it will only offset 80 percent of income.

Estate taxes were also effected by the new laws, increasing them from $5,490,000 for an individual in 2017, to $11,200,000 under the new law. For couples, it increased from $10,980,000 in assets that will not be taxable for estate purposes, to $22,400,000.

However, Peters said these changes revert back to the 2017 law after the year 2025.

Producers wanting or needing to purchase equipment should know that like-kind exchanges are gone under the new law.

"Now we have to treat the trade-in of the old equipment as a sale (income), then take the write-off of the new as an expense," said Peters, adding that the sale of old equipment will not be subject to social security tax, and that the deduction of the new will offset self-employment income.

Peters said a C Corporation could switch to an S Corporation to take advantage of the 199A new tax law. He said it would be easy to do, but should only be done under the guidance of someone knowledgeable, such as a tax preparer.

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