We Should Have a Tax Bill
Dec 03, 2017
Late Friday night / early Saturday morning, the Senate finally passed a tax bill. The process of getting this tax bill was not pleasant to watch unfold, but we finally have a bill from the Senate.
Under normal rules and procedures, this bill would go over to a conference committee between the House and the Senate. However, this is not normal times. I am predicting that there is at least a 50% chance that the House will simply vote on accepting this bill at some point and then pass it onto President Trump to sign. In the meantime, I will update you on the major items of importance to farmers that are contained in this bill (we have posted several times before on many of these provisions):
•Farmers will be allowed to deduct 23% of their net farm income as an additional deduction (up from the original proposal of 17.4%). There is a limit of 50% of wages paid by the farm business, however, this limit does not apply if your taxable income is less than $500,000 (MFJ).
•We believe that this deduction may also apply to self-rental income earned by farmers who rent their ground to their farm operation. We do not have any formal guidance on this, however, the actual code section says “effectively connected with the conduct of a trade or business”, therefore it seems that a farmer’s self-rental income should qualify since it is effectively connected to the farm operation. Another reason for this conclusion is that the 23% deduction also applies to REIT income.
•100% bonus depreciation is allowed on all new farm assets until December 31, 2022. After 2022, this percentage reduces by 20% each year until bonus depreciation is eliminated beginning in 2017.
•Section 179 is bumped to $1 million effective for taxable years beginning in 2018 and is indexed to inflation. The phase-out begins at $2.5 million up from the current $2 million level.
•Interest expense is allowed for all farm operations with average revenues under $15 million. If your revenues are over this amount, you can only deduct interest to the extent of 30% of modified income (essentially taxable income plus interest expense and income taxes “EBIT”). However, any farm operation can elect to deduct 100% of interest expense. If you make this election, you are forced to use longer depreciation lives and cannot take bonus depreciation. You are still allowed to take Section 179.