Agricultural and Natural Resource Issues

Chapter 9 pp. 287-3272018 National Income

Tax Workbook™

Agricultural and Natural Resources Issues

Barry Ward, Davis Marrison, and Chris Bruynis

Ag Economy Update NIB

1. Farm Economy continues to be weak2. Farm commodity crop payments lower in 2018 (or zero).3. Chinese tariffs one cause of weaker crop prices - soybeans4. New Farm Bill legislation being debated5. Market facilitation program

“It does not matter how slowly you go as long as you

do not stop.” —Confucious

Market Facilitation Program (MFP)

Soybeans – $1.65 per bushel. Corn – 1 cent per bushel. Dairy – 12 cents per hundred weight. Pork – $8 per head. Wheat 14 cents per bushel.

Chapter 9: Agricultural and Natural Resources Issues

Issue 1: Farm Loss Deduction Limits Issue 2: Depreciation of Farm Assets Issue 3: Farm and Ranch Tax Elections Issue 4: Farm Lease Income and the QBI Deduction Issue 5: Section 199A and Agricultural and Horticultural

CooperativesOthers: Charitable giving – gifting commodities

Chapter 9: Learning Objectives

Understand how new loss limitations apply to farm and nonfarm losses Depreciate farm vehicles and other assets Explain how the new like-kind exchange rules impact an equipment trade-in Apply the general rules that are applicable to making and revoking farm and

ranch tax elections Discuss how the QBI deduction applies to farm rental income Calculate the QBI deduction for a patron of an agricultural or horticultural

cooperative

Issue 1:Farm Loss Deduction

LimitsPages 288-292

Farm Loss Limit prior to TCJA pp. 288-289

Rule applied only if receiving applicable subsidy Threshold was the greater of:

• $150,000 ($300,000 MFJ)• The excess of aggregate net farm income of 5 preceding

years If farmer had non-business income exceeding the

threshold then the excess loss was carried over as Schedule F deduction (affecting ordinary and SE tax) – loss over non-business income was a NOL

New Rules under TCJA pp. 289-290

Loss limit applies to all noncorporate businesses Applies to S corp shareholders too! No subsidy received requirement – all businesses now subject Revised threshold amount

$250,000 ($500,000 MFJ) No 5 year net income lookback option

Anything over this threshold is a NOL

Ex. 9.2 – David Stump p. 290

Single taxpayer Sch. C loss $248,000, Sch. F loss $22,000 Aggregate business loss $270,000 Loss deduction limited to $250,000 (assuming wage income) Excess loss ($20,000) is part of NOL (Ex. 9.3) Self Employment Tax unaffected by NOL

Ex. 9.4 Flow-through Loss Limitation p. 290

Applies at owner level Owner combines flow-through items with other individual items

(Ex. 9.4)David Stump

Sole proprietor Sch C loss (248,000)

Sole proprietor Sch F loss (22,000)

Saw-You-Coming K-1 gain 9,000

Overall Loss (261,000)

Loss Limitation 250,000

Carryover as part of NOL 11,000

At-Risk and Passive Activity Loss (PAL) Limits pp. 290-291

Rules unchanged by TCJA Applied to each of the taxpayer’s losses before applying the

TCJA overall loss limitationFirst, at-riskThen, PAL

Disallowed losses carryover

Example: 9.5 PAL Limits p. 291

Sam Adams

Farm operation (active) ($242,000)

Winery (passive) ($87,000)

Flower shop (passive) $44,000

Total net income ($285,000)

Example: 9.5 (continued) p. 291

Sam Adams Actual As Limited

Farm operation (active) ($242,000) ($242,000)

Winery (passive) limited

($87,000) ($44,000)

Flower shop (passive) $44,000 $44,000

Total net income ($285,000) ($242,000)

Practitioner NoteImpact of this limitation p. 291

The new Loss Limitation limits the amount of nonbusiness income that can be offset by business losses Creates an NOL where there would be noneLittle or no nonbusiness income? The business loss becomes a NOL

Farm Net Operating Losses under TCJA

5-year carryback for farm losses eliminated 2-year carryback for nonfarm losses eliminated

Farms still have this option Carryover loss deduction limited to 80% Unlimited carryover - years Farmers may elect out of 2-year carry back

pp. 291-292

Ex. 9.6 Surprise for Denise p. 292

$382,000 farm loss – limited by TCJA

Pay tax on the $166k$132,000 NOL carryover (or back?) ($382K - $250K)

Ex. 9.7 Denise w/o Wages p. 292

What do accountants suffer from that ordinary

people don’t?Pages 293-305

Issue 2:Depreciation of Farm

AssetsPages 293-305

Issue 2: Depreciation of Farm Assets pp. 293-305

5-year MACRS for new farm equipment and machinery Used farm equipment remains as 7-year Farm use is defined by IRC §263A

• Incidental processing okay• Not custom operator• Not reseller

ADS life continues at 10 years for all Grain bins and fences continue as 7-year MACRS

Depreciation Method p. 293

New Methods: 200% DB for farm assets in the 3, 5, 7 and 10-Year MACRS

classes (or 150% DB if desired) Note trees and vines are 10 year property – previously SL, now

150% DB 15 and 20 year property continue at 150% DB

Ex. 9.9 Difference a Year Makes p. 294

New combine purchase $430,000 W/out bonus or sec. 179

2017 $46,071 depreciation($430,000/7 x ½ Yr x 150%)

2018 $86,000 depreciation($430,000/5 x ½ Yr x 200%) $39,929 more than 2017

Vehicle Depreciation pp. 295-296

IRC §280F limits apply to passenger vehicles• Definitions unchanged by TCJA• Limits increased - $10,000 in Year 1

Ex. 9.11 Problem with Bonus p. 296

Honey Hamm took 100% bonus on her 75% business use pickup ($32,000 x 75% = $24,000)

New Bonus limit on passenger vehicles - $18,000 Deduction limited to $13,500 ($18,000 x 75%) $10,500 disallowed ($24K - $13.5K) will be

recovered starting in Year 7 ($5,760)

Ex. 9.11 Remedies p. 296

Technical correction could allow 50% bonus depreciation in such casesHoney could elect out of bonus

• Would affect all 5-year property• New farm equipment is now 5-year

Section 179 on SUVs p. 297

Unchanged by TCJA• Definition of SUV• Maximum Sec. 179 still in place

Now the $25,000 maximum is indexed for inflation – in $100 incrementsBonus may be claimed and is not limited

No Like Kind Exchange for Personal Property pp. 298-299

§1031 only applies to real property under the TCJA

Equipment trade-ins are now taxable events Most likely result will be taxable gain Offset is increased basis for depreciation

Ex. 9.12 Farm Tractor Trade-in pp. 298-299

List price of new tractor - $397,000 Trade-in allowance - $112,000 Cash price - $285,000 Adj tax basis of trade $61,262

(250,000-188,738) Reportable ordinary gain $50,738

(112,000-61,262) – See Fig. 9.8

Ex. 9.13 Tax Planning p. 300

Recognized gain could likely be offset by depreciation Amos can Sec. 179 because he’s under the $2.5 million

investment limit Bonus is class by class (too much?) Depreciation reduces SE tax Equipment gain is not SE income

Fig. 9.9 Sec. 179 or Bonus p. 302

Numerous limits on Sec. 179 Bonus is class by class Bonus unavailable to some

taxpayers based on other tax elections

Bonus automatically applies (v. 179 election)

Ex. 9.17 Specific Dollar Amount of Depreciation

$300,000 net cash incomeSch. F goal of $10,000Depreciation on prior assets - $120,000Needs $170,000 of depreciation from $220,000 of current year purchasesBonus won’t work – all 5 year property

p. 303

Ex. 9.17 Specific Dollar Amount of Depreciation continuedp. 303

Section 179 of $157,500 Leaves $62,500 for MACRS $62,500 / 5 x 0.5 x 200% = 12,500

Net Cash Income $300,000 “Old” Depreciation -$120,000 Section 179 -$157,500 “New Depreciation” -$12,500 Schedule F NFI $10,000

Issue 3:Farm/Ranch Tax Elections

Pages 305 - 315

Issue 3: Farm/Ranch Tax Elections p. 305

General Rules for Making Election:

• Some made by default• Some have to elect on

return• Some are separate election• See Figure 9.10 for

guidance (pp 309 -313)

Issue 4:Farm Lease Income & QBI

Pages 316 - 319

Farm Lease Income and QBI Deduction p.316

Qualified business income (QBI)Qualified items of income, gain, loss, deduction from T or BT or B defined w/ reference to I.R.C. §162Look to case lawCommissioner v. Groetzinger

• Involved w/ continuity and regularity• Primary purpose is income/profit - intent

Rental Income pp. 316-17

Farm rental income qualified for QBI deduction if conducted regularly and for income/profitMay be QBI even if

• not subject to SE tax • passive activity

Cash Lease p. 317

Cash lease tenant pays cash for acreage. Usually no material participation and not subject to SE

tax. (see requirements for participation). Is eligible for QBI deduction if Trade or Business.

Material Participation p. 317

Cash lease subject to SE tax if landlord (LLC) materially participates

Material participation if:• Landlord furnishes most tools/equipment• Landlord advances $ or has financial responsibility

Participation Tests p. 317

Tests for material participation (3 of 4)1. Pay half costs, furnish half tools, advise or consult, inspect (3

out of 4)2. Regular/frequent management decisions3. LL works 100 hours or more over period that is 5 weeks or

more4. Activities that show material and significant involvement

Landlords: Crop share landlords filing a Schedule F are eligible Cash rent landlords filing a Schedule E likely won’t be eligible

pending final regs (although there is some disagreement) Crop share landlords filing Form 4835 may qualify (if they are

materially participating they likely will) Landlords will likely have to pass as a trade or business according

to IRC Section 162

New IRC Section 199A Deduction for Qualified Business Income (QBI)

What Do You Think?

Landowner who completely turns over management of the land to an agent, such as a professional farm management company, and does not otherwise materially participate in the farming operation, does not have SE income from renting land for agricultural use but can still claim the QBI deduction if the purpose of the rental is income or profit.

A triple net lease arrangement, where the tenant pays the taxes, insurance, and maintenance, may not give rise to material participation, and it may not qualify for the QBI deduction.

Farms with Multiple Entities: Proposed regulations indicate that common ownership of

business entities allows the farmer to combine the rent income with the farm income – an advantage

Section 1231 Capital Gain Income: Will not qualify as QBI if the gain is treated as a capital gain –

likely not good for dairy producers

New IRC Section 199A Deduction for Qualified Business Income (QBI)

Conservation Reserve Program Payments

CRP payments quality for QBI if is a regular activity and for profit

Subject to SE tax if actively engaged (unless receiving social security)

8th Circuit – not SE income So Outside 8th – Yes QBI,

Inside 8th – No QBI?pp. 318-19

Issue 5:§199A and Ag. &

Horticultural CooperativesPages 319 - 327

Issue 5: §199A and Ag. & Horticultural CooperativesTCJA repealed § 199 (Domestic Production

Activities Deduction)TCJA originally provided Specified Ag. or

Hort. Cooperatives with a deduction that was 20% of gross.

Sales to non-cooperatives were 20% of net.Known as the “grain glitch”Consolidated Appropriations Act (CCA)

modifies deduction under § 199A(g) to rather provide a deduction similar to DPAD.

p. 319

Sales to Coops p. 323

QBI deduction for patron is 20% reduced by lesser of: 9% of QBI from T or B allocable to qualified coop

payments, or 50% of allocated W-2 wages

Allocating the Deduction to Patrons p. 323

Allocate the coop’s deduction to patrons based on value of business w/ coopSales to coops may result in a net QBI Deduction: Greater than 20% if the farmer taxpayer pays no W2 wages and coop passes

through all or a large portion of the allocable QBI Equal to 20% if farmer taxpayer pays enough W2 wages to fully limit their coop

sales QBI deduction to 11% and the coop passes through all allocable QBI Less than 20% if farmer taxpayer pays enough W2 wages to fully limit their

coop sales QBI to 11% and the coop passes through less than the allocable QBI

Ex. 9.24 QBI Deduction Coop Patron p. 324No Wages Paid

Pat sold grain through coop$230K PURPIM, $20K patronage dividend$200K expenses – no wages$50K QBIDeduction is $10K (20%) reduced by lesser of $4,500 or $0….so $10K

Ex. 9.25 QBI Deduction Coop Patron p. 324with additional Pass-Through Deduction

Same facts as in 9.24 except…Pat also got $2,500 deduction from coopQBI deduction is $12,500 ($10,000 + $2,500)

Ex. 9.26 QBI Deduction Coop Patron p. 324 with Wages Paid

Same facts as in 9.24 except….Pat paid $25,000 W-2 wagesQBI deduction is $5,500 ($10K reduced by lesser of $4,500 or $12,500)

Gifting farm commodities

One possible method for farmers to contribute charitably is to gift commodities to the charitable organization– escapes tax and avoids the limits due to new higher standard dedcutions

Agricultural and Natural Resources Issues