The new federal tax law reduces the benefits of carryover losses that farmers had used to their advantage in the past. Fortunately, farmers and ranchers have several strategies they can use to adjust their income between the current tax year and the next tax year.
“What we want essentially is little or no income. What we don’t want is a loss,” advises Rod Mauszycki, principal with CliftonLarsonAllen in Minneapolis, Minnesota, and Taxlink columnist for DTN/The Progressive Farmer.
Here are three reasons why you don’t want a loss now.
1. 199A – the new 20% deduction for qualified business income. Any business loss is carried forward, reducing next year’s income and thus decreasing your 199A deduction next year.
For example, let’s say you have a $20,000 net loss this year that otherwise would have qualified for the 199A deduction. And, next year, your net qualified business income is $150,000. You would not get a 199A deduction this year, because you had no net income, and your 199A deduction next year would be 20% of $130,000 (150,000 minus 20,000), or $26,000 deduction for the two years.
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If, instead, you had no profit this year and next year, you earned $150,000 in qualified business income. Your 199A deduction would be 20% of $150,000, or $30,000.
The 199A deduction does not apply to income in subchapter C corporations.
2. Net Operating Losses (NOL) – Starting in 2018, NOL carryforwards (generated in 2018 and beyond) will only offset 80% of taxable income, leaving 20% as taxable income even if you have excess net operating losses. Therefore, NOLs will only offset a portion of your income in future years, Mauszycki explains.
3. Farm Loss Limitation – Under the new tax act, the old excess farm loss rule for (non-C corporation) taxpayers who received an applicable subsidy, such as a Commodity Credit Corp. (CCC) loan, has been changed. Previously, taxpayers who received a CCC loan were restricted in the deductibility of a farm loss. However, the disallowed portion was carried to the following year, tested again for limitation purposes and claimed on Schedule F, which helped reduce self-employment tax.
Under the new tax law, losses are now subject to “excess business loss” limitations. The net business loss is limited to $250,000 ($500,000 for married filing jointly). And, these excess business losses are carried forward as part of the taxpayer’s net operation loss instead of claiming the loss on Schedule F.
“The hardest part of the new tax law may be in convincing farm and ranch clients that it’s OK to make a little income and pay some tax,” Mauszycki notes. “If they simply build up their net operating losses as they might have done in the past, it may come back to bite them with a much steeper tax bill when they have a good year.”
Another area for flexibility at tax preparation time is deciding how to depreciate the purchases you made this year. The new tax bill makes it easier to deduct 100% of your depreciable assets in the year of purchase. But, that may not be the best tax strategy if it would reduce your income to a loss. Your tax preparer may advise depreciating the cost over the life of the asset. You may also decide to capitalize machinery repair costs.
Of course, you can also hold back on prepaid expenses if it looks like you will have a loss this year. But, that decision has to be made before Jan. 1, and you may lose out on early-order discounts.
As with any tax advice, especially with the new tax law this year, seek expert agricultural tax counsel.
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