I'm finishing up tax planning, and I thought it would be a good time to reflect on 2018. It has been a wild ride on the tax side. The Tax Cuts and Jobs Act of 2017 was a major change. Even after proposed treasury regulations, there are many gray areas. Financially, many of my ag clients are struggling and seeing equity disappear. Here are my general impressions:
-- Losses are bad. From a purely financial prospective, 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 Section 199A. If a trade or business produces a loss, that loss is carried forward to reduce future 199A deductions. For more on how the new tax law treats losses, please revisit my June column here: https://www.dtnpf.com/…
-- 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 DPAD deduction), 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. As I said, these are general statements. 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. But if you have a C-corp and a separate land-holding, pass-through entity, you can aggregate the actives if control group requirements are met. This would allow the qualified business income from the land rental to qualify for 199A. For more on the IRS' rules governing land and the Section 199A deduction, please see September's column here: https://www.dtnpf.com/…
-- Don't be a hobby farm. I have written on this before, but under the new tax law, there is no 2% itemized deduction for hobby farms. 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. If you have poorly producing land, don't spend time and money trying to make it work. Focus on what you do best and either outsource or stop doing what you are not that good at.
Editor's Note: Tax Columnist Rod Mauszycki is a CPA and tax partner with the accounting firm of CliftonLarsonAllen, in Minneapolis, Minnesota. Send questions to email@example.com
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