As I write this column in early December, we don’t know the final outcome of tax reform. We have a House version and Senate bill with significant differences, and no guarantee that passage will occur, much less how the two versions will be reconciled. If this legislation does get enacted, here are some points to delve into with your tax adviser.
Farm Loss Carrybacks. A farm loss incurred in the 2017 tax year can be carried back five years to offset prior taxable income. Starting in 2018, the House version would allow only a one-year carryback of a farm loss, while the Senate allows a two-year carryback. If tax reform is enacted, rates will be lower for all taxpayers in 2018 and forward. As you work with your tax adviser in preparing the 2017 return, does it make sense to drive the depreciation deeper and swing the loss back into 2012 and then forward into following years? Efficient tax planning is all about getting the best rate of return on deductions. A carryback to higher profit and higher bracket years may be efficient.
The Reduced Business Rate. The House bill calls for a 25% rate cap on some of the income from proprietorships, partnerships or S corporations, while the Senate bill allows a subtraction for a portion of this income. A key point is understanding how your (or your spouse’s) salary from the farming entity and any rent payments are treated under this new regime. The amounts of salary and rent payments may need reconsideration based on the final legislation.
Medical Expenses. The House version calls for repeal of the itemized medical deduction, whereas the Senate does not. Even if not repealed, medical deductions under present law are largely nondeductible because of the 10%-of-income offset. A new small employer health reimbursement arrangement (HRA) allows business deductibility for employee medical costs. These HRAs should get a fresh look for those who do not have a pretax mechanism for medical costs. For those without an entity employer, a Health Savings Account is worth considering.
Employer-Provided Meals. Farmers routinely provide tax-free meals to employees who are on-site during the workday. Those whose business is organized as a C corporation, with sufficient business reason, may also provide this fringe benefit in connection with corporate lodging. The House bill would repeal this benefit for 5% or more owners; the Senate bill disallows the employer deduction for on-premises meals, but not until 2026. These are narrow provisions that won’t get much press coverage, so if the legislation passes, work with your tax adviser to sort out the intricacies and any fringe benefit opportunities that might remain.
This is a massive tax bill, with many small provisions that may change your approach to certain farm transactions. Plan on a longer session with your tax adviser in the months ahead.
Tax Columnist Andy Biebl is a CPA and tax partner with the accounting firm of CliftonLarsonAllen, in New Ulm and Minneapolis, Minn.
Read Andy’s “Ask the Taxman” column at about.dtnpf.com/tax.
You may email Andy at firstname.lastname@example.org.
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