Rules Of Aggregate Income

IRS Section 199A guidance clarifies deductions for some active farm operations.

The IRS outlined rules on how to qualify for the Section 199A deduction, which includes several provisions favorable for farmers but could limit the deduction for landowners who aren’t involved in farming operations, Image by Jim Patrico

Pass-through business entities rules are a little clearer now thanks to a new Internal Revenue Service Guidance, Section 199A. The tax deduction, experts say, includes several provisions especially favorable for farmers.

Businesses structured as sole proprietorships, partnerships, trusts and S corporations may now deduct 20% of their qualified business income. This does not apply to C-type corporations, which are tied to the 21% tax rate detailed in the new tax law.

“I thought, overall, it was fairly favorable to taxpayers on the farm side,” says Paul Neiffer, a farm accounting expert with the firm CliftonLarsonAllen.

GROUP PLANNING. Neiffer and American Farm Bureau economist Veronica Nigh agree that one of the most favorable provisions guides how multiple farm entities are treated. As Neiffer notes, commercial farm operations these days often have multiple limited-liability companies (LLCs) owning different pieces of land; an S corporation owning machinery; and/or another business entity running farming operations. The new regulations allow farmers to group all of those entities together if they meet certain criteria and treat it all as one entity.

“I think it’s a pretty clear win that farmers will be able to aggregate these entities under one business, as long as they can show common ownership,” Nigh says. Usually, farmers will need to show 50% common ownership, which Nigh doesn’t see as a big hurdle. The regulation also allows farmers to aggregate wages, a decision that could save a lot of paperwork.

“This allows them to aggregate all of that stuff together, combine all the wages, combine all the property and just have one calculation to get the full deduction or coming close to getting the full deduction,” Neiffer explains.

There are still questions about how cash-rent landowners and crop-share landowners qualify for the Section 199A. Neiffer says it appears landowners won’t qualify for the deduction if unrelated parties are renting the land.

“What I’m reading between the lines is it doesn’t qualify, but we’re not sure,” Neiffer says. “Maybe a crop-rental landlord that shares in the expenses … maybe that’s enough to qualify.”

Nigh agrees with that assessment, adding it appears the owner’s involvement would need to rise to a level that generates some amount of self-employment tax to earn the deduction. It could have an impact on decisions to sell or hold land.

INCOME CAPS. The IRS rule is clear capital gains, such as a Section 1231 gain when selling depreciable property, does not qualify as business income for businesses seeking to receive the pass-through entity deduction. It also sets income caps for those eligible.

Those caps are as follows: For farmers or other businesses with taxable income above $315,000 (married filing jointly) or any other taxpayer with taxable income above $157,500, the deduction is capped at 50% of wages, or 25% of wages in business plus 2.5% “of the unadjusted basis immediately after the acquisition of all qualified property.”

Property limitations and W-2 wages do not apply for farmers with $315,000 or less in taxable income (married filing jointly), or $157,500 for all other taxpayers. The rules and exclusions apply to those businesses with taxable incomes above those thresholds. The deduction phases out and does not apply to married-filing-jointly farmers with more than $415,000 in taxable income.

“The majority of farmers out there, they make less than $315,000 in taxable income,” Neiffer says. “Even very successful farmers a lot of times get their taxable income below $315,000. So, they don’t care about wages or qualifying property.”

The IRS rules did not address how Section 199A will work for farmer cooperatives. The IRS announced it would deal with that in a later regulatory release.

“That guidance is going to come out later on,” Neiffer says. “I think in the code it’s pretty clear you will still do your 199A as normal, then you are going to have to look at your operations related to cooperative sales and reduce it by either lesser than 50% of the labor related to those sales or 9% of qualified business income related to those sales.”

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