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Positive Impacts of Recent U.S. Tax Reform on American Farmers

The tax bill that President Trump signed into law on December 22 remedies some of the tax challenges faced by many American farmers. The lower marginal rates, the treatment of pass-through income, depreciation and expensing changes, will help American farmers as they continue to provide affordable food for people in the United States and around the world.  

Highlights of these positive changes for farmers:

  • Allows farmers to deduct the entire cost of new and used equipment in the first year of investment provided it falls under the Section 179 small business cash expensing limit. Increases the Section 179 small business cash expensing limit to $1 million and increases the level at which the deduction begins to phase out to $2.5 million. 

Note: If Section 179 expensing limits do not apply, growers may depreciate agricultural machinery and equipment over 5 years, as opposed the previous seven-year requirement.

  • Allows businesses to fully and immediately write off business investments through 2022. After 2022, this provision is phased out until it is eliminated in 2027. 
  • According to the American Farm Bureau Federation, 94% of farmers and ranchers pay taxes as individuals and could benefit from the lower individual taxes rates and pass through deductions.  The new tax law doubles the individual standard tax deduction, which is claimed by roughly 78% of farmers and ranchers (according to the Nebraska Farm Bureau), to $24,000 for joint filers.  In addition, growers operating pass-through businesses (such as partnerships or Subchapter S companies) will benefit from being able to deduct up to 20% of the income generated by a pass-through entity from taxation, with some limitations.  This provision sunsets after 2025.
  • Maintains the ability of growers to deduct property taxes as a business expense in Schedule F, E or C, as individual filers.  While the law does establish a $10,000 limit on the deduction for state and local income and property taxes, the limit only applies to itemized deductions claimed on Schedule A, filed by individual filers. Even though most farmers file income taxes as individuals, business income from a farm or ranch is reported on Schedule F, E or C, where property taxes can still be deducted as a business expense.  
  • Doubles the estate tax exemption to $11 million for individuals, which will reduce the number of family farm operations subject to the estate tax, and therefore reduce estate planning costs for many growers. This provision sunsets after 2020.

While the new tax provisions are in effect for the 2018 tax year, implementation of many of the provisions of the law will take time.  The U.S. Treasury and the Internal Revenue Service will need to issue regulations and/or interpretive guidance on many of the law’s provisions.  Lindsay encourages its customers to consult their tax advisors on potential actions to take to maximize these benefits for the 2018 tax year.

Information included in this post is for illustrative purposes only. Lindsay Corporation and its affiliates are not tax advisors, and this post is not intended to offer any tax advice. Please consult with qualified tax professionals concerning your specific situation.