The new tax law threw a curveball at the farming community by way of the “grain glitch,” also known as Section 199A. Section 199A provides up to a 20% deduction on farm profits subject to certain limitations.
One important question arose regarding Section 199A in connection with active farming. Many farmers put the land in a separate partnership, and the farming operation rents the land. This “self rental” avoided self-employment tax on rental income. Could we aggregate self rental with the farming operation to maximize the Section 199A deduction? The answer came in the proposed regulations: As long as the farm and the land rental are part of a common group, and the entities have the same taxable year, the rent would be aggregated with the farm income. So, farmers get the best of both worlds: self-employment tax avoidance and increased Section 199A deduction.
DEDUCTION HAS LIMITS. What if you are a retired farmer and renting the land: Is there any way to get the Section 199A deduction? The proposed regulations say the deduction is only for qualified business income. The IRS normally does not consider rental as business income. There is some authority to say that if the landowner provides services or incurs significant costs related to the rental, it may rise to the level of a trade or business. The problem in agriculture is that a cash rent landowner almost never performs sufficient services to rise to the level of a trade or business. Thus, no 199A deduction. What if the landowner enters into a crop share?
QUALIFYING TRADE. There is some authority to say that if the landowner shares in income and expense, and has some management authority, the crop share could rise to the level of a trade or business, and would qualify for Section 199A. Does this mean a retired farmer should jump into a crop share? It’s not that simple. First, these are proposed regulations. Second, crop share is risky since you share in profits and losses. A traditional rental agreement may provide more stability and comfort.
If your taxable income is over the threshold amounts (tentative taxable income over $157,500, or $315,000 for married filing a joint return), little or no deduction may be available. Whether you are passing on land, renting or considering crop sharing, Section 199A offers you some opportunities. Consider your time line carefully, as well as your security needs. And, remember, elements of this rule may change.
Tax Columnist Rod Mauszycki is a CPA and tax partner with the accounting firm of CliftonLarsonAllen, in New Ulm and Minneapolis, Minnesota.
Read Rod’s “Ask the Taxman” column at about.dtnpf.com/tax.
You may email Rod at firstname.lastname@example.org.
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