Tax planning always makes me reflect. To say 2019 was a wild ride is an understatement. We saw large swings in commodity prices, increases in dairy prices and optimism in the protein segments. However, the majority of my clients still struggled. And, those who made money have to utilize the profits to rebuild equity.
At the start of 2019, tax reform was relatively new, and not many regulations were issued. Throughout the year, we received additional guidance. However, 199A is still very difficult to wrap your arms around. Although 199A is a nice benefit, it's not perfect. For those who had losses in 2018, they need to fill that hole with income before getting a 199A deduction. There is also confusion as to cooperative pass-through. It's obvious our farm clients need further education to maximize 199A.
Clients with profits are experiencing the impact of tax-reform changes to net operating losses (NOL). Prior to 2018, 100% of NOLs could be used to offset income. NOLs generated in 2018 and forward can only offset 80% of income and still don't reduce self-employment tax. If farmers are utilizing 2018 NOLs, they may be in for a surprise.
Another impact of tax reform is charitable giving. Most of my clients are very charitable, but with increased standard deduction, they do not receive a tax benefit. I keep telling my clients that the new norm is to use commodity gifting to charities. And, if they are collecting required minimum distributions (RMD) from retirement accounts, have the RMD directly paid to the charity of their choice.
EMOTIONS IN PLAY
The thing that hit me most isn't tax-related. It's the painful transition of running the farm not on emotions but based off of the numbers.
For some reason, I feel that I have seen clients self-destruct because of their emotions more than ever before. I've seen clients walk away from their farming operation with nothing because they stayed in too long -- because of emotions. I've seen clients make poor business decisions -- because of emotions. Although emotions are part of farming, they can cloud judgment.
But, I also have hope. I recently told my client's son that working hard won't make him successful. He needs to work smart. I told him he needs to spend an hour a week understanding the farm's financial position and the markets.
When he said he didn't have time, his dad chimed in. Dad said if he had focused less on field time, the farm would have made $1 million more in revenue through proper marketing. He looked at his son and asked if one extra hour in the field each week could have produced those results. Now, his son wants monthly accrual financials to help him manage the farm.
Editor's Note: DTN Tax Columnist Rod Mauszycki, J.D., MBT, is a tax principal with CLA (CliftonLarsonAllen) in Minneapolis, Minnesota. Read Rod's "Ask the Taxman" column at about.dtnpf.com/tax. Send questions to firstname.lastname@example.org.
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