TaxLink

As I write this, I'm finishing up tax planning and thought it would be a good time to reflect on 2018. On the tax side, it has been a wild ride. The Tax Cuts and Jobs Act of 2017 was a major change. Even after proposed treasury regulations, there are many gray areas. On a financial side, many of my ag clients are struggling and seeing equity disappear. Here are my general impressions:

> Losses are bad. From a purely financial perspective, losses are bad. It means you are not profitable and are reducing equity, and/or incurring debt. From the tax side, losses are not as advantageous anymore. In tax years beginning after Dec. 31, 2017, if the loss produces a net operating loss (NOL), there is an 80% limitation. That means NOLs created after 2017 can only offset 80% of pre-NOL taxable income. Another issue with losses connected to a trade or business relates to 199A. If a trade or business produces a loss, that loss is a carryforward to reduce future 199A deductions.

> 199A and wages. To sum it up in a few general statements: If you sell to a cooperative that passes through 199A (basically, the old Domestic Production Activities Deduction, or DPAD), paying W-2 wages is bad. If you have income in excess of the thresholds, paying W-2 wages is bad. In these cases, wages are a potential limiting factor when calculating your 199A deduction. In some cases, there will be enough cooperative income, business assets and/or wages to avoid the limitations.

> 199A and C corps. Even I misunderstood this at first. C corporations are not eligible for the 199A deduction. If you have a C corp and a separate land-holding pass-through entity, you can aggregate the activities if control-group requirements are met, allowing the qualified business income (QBI) from the land rental to qualify for 199A.

> Don't be a hobby farm. I have written on this before, but under the new tax law, there is no 2% itemized deduction. Therefore, if you are deemed to be a hobby farm, you must pick up all income but would not be able to take any deduction.

> Do what you do best. As I work with clients and their lenders, one thing keeps coming up. Do what you do best, don't spend time and resources on other areas. If you are good at marketing, spend time there. If you are good with crops, stop dabbling in livestock. Focus on what you do best, and either outsource or stop doing what you are not that good at.

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 taxman@dtn.com.

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