The ag economy isn't great and many producers are struggling to break even. In the past, farmers accepted losses and even looked at them as opportunities. Having good and bad years is just part of the rollercoaster called farming. However, the new tax law changed how we look at farm losses.
Under the old tax law and the 2014 Farm Bill, taxpayers who received a Commodity Credit Corporation (CCC) loan were restricted in the deductibility of a farm loss (this rule didn't apply to C corporations). The disallowed portion of the loss was carried to the following year, tested again for limitation purposes and claimed on Schedule F (Form 1040).
Under the new tax law, the old excess farm loss rule does not apply; losses are now subject to "excess business loss" limitations. Excess business losses are carried forward as part of the taxpayer's net operating loss (NOL) instead of claiming the loss on Schedule F.
So why does this matter? Under the old rules, excess farm losses offset farm income without limitation. Because it went on Schedule F, it also offset income subject to self-employment tax. That was a win-win!
Under the new tax law, an excess business loss is NOT deducted on the Schedule F and does NOT offset self-employment income. Also, post-2017 NOLs can only offset 80% of pre-NOL taxable income. That is, even if you have a substantial loss in 2018 followed by a substantial profit in 2019, you could offset no more than 80% of the 2019 taxable income. Farmers are allowed to carry back farm NOLs two years, giving some flexibility. However, due to the dynamics of the excess business loss rules, the farm NOL will be limited to $250,000 ($500,000 for married filing joint).
So what are some strategies? First and foremost, avoid creating NOLs. If losses are unavoidable, keep business losses less than $500,000 (if filing a joint return). Also consider the following:
1. Stop prepaying expenses.
2. Hold off equipment purchases.
3. Don't elect to expense equipment purchases under Section 179 or bonus depreciation.
4. Sell assets you do not need to generate profits.
5. Elect out of deferred payment contracts.
6. Capitalize repair costs.
7. Capitalize fertilizer costs.
Under the new tax bill, there are tremendous opportunities and pitfalls. Right now, many of you are likely in the field and marketing crops. Tax planning probably isn't on your radar. But don't wait until the last minute to do tax planning. As you can see, even in loss years, tax planning is essential.
Editor's Note: Tax Columnist Rod Mauszycki is a CPA and tax partner with the accounting firm of CliftonLarsonAllen, in Minneapolis, Minnesota.
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