1/21/2019 Circular 230 Disclosure The information provided in this presentation is for educational purposes only. This presentation is designed Farm Tax Update to provide accurate and authoritative information concerning the subject matter covered, but it is communicated with the understanding that the publisher is not engaged in rendering legal, accounting, or other David Marrison, OSU Extension professional services. If legal advice or other expert assistance is required, the services of a competent professional person should be sought. Teaching Objectives Thank You Share the Key Provisions of Tax Cuts & Job Act of Barry Ward - Director, OSU Income Tax Schools & 2017 Which May Impact Farm Operations. Leader, Production Business Management Federal Estate Tax Dr. Chris Bruynis- Area Leader, Area 16 & Ross County Depreciation Changes Agriculture & Natural Resources Extension Educator Like-Kind Exchanges Net Operating Loss Qualified Business Deduction §199A and Ag. & Horticultural Cooperatives 2018 Farmers Tax Guide Tax Cuts & Job Act of Get a copy of the Farmer’s Tax Guide at or your local County Extension 2017 office or access it on-line at: http://www.irs.gov/pub/irs-pdf/p225.pdf 1
1/21/2019 “Tax Cuts and Jobs Act” Act to provide for reconciliation pursuant to titles II and V of the concurrent resolution on the budget for On December 22, 2017, President fiscal year 2018 (AtPfRPtTIIaVotCRotBfFY2018) Trump signed H.R. 1, the “Tax Cuts and Jobs Act” into law which now changes the taxation landscape for individuals Also known as the: “Tax Cuts and Jobs Act” and businesses. It is the largest tax (TCJA) reform since the “Tax Reform of 1986.” Signed into law on December 22 nd , 2017 New Tax Brackets General Taxpayer • The new tax brackets are effective for years after December 31, 2017 and expire after December 31, Changes 2025. • The income tax brackets will be adjusted for inflation after December 31, 2018 and rounded up to the next lowest multiple of $100 in future years. Individual Married Filing Jointly 2017 Tax Brackets 2018 tax brackets Rate Income Bracket Rate Income Bracket 10% $0 - $18,649 10% $ 0 - $19,049 15% $18,650 - $75,899 12% $19,050 - $77,399 25% $75,900 - $153,099 22% $77,400 -164,999 28% $153,100 - $233,349 24% $165,000 - $314,999 33% $233,350 - $416,699 32% $315,000 - $399,999 35% $416,700 - $470,699 35% $400,000 - $599,999 39.60% $470,700+ 37% $600,000+ 2
1/21/2019 Standard Deduction Schedule A Deductions 2017 2018 1. State/Local/Property Tax (SALT) Filing Status Deduction Deduction 2. Medical and Dental Expense Deduction 3. Home Mortgage Interest Deduction $6,350 $12,000 Single 4. Personal Casualty & Theft Loss Deduction $12,700 $24,000 Married Filing Jointly 5. Charitable Contribution Deductions $9,350 $12,000 Head of Household 6. Misc. Itemized Deductions Subject to 2% Floor $4,050 none Personal Exemption State and Local Taxes (SALT) Deductions Home Mortgage Interest • Interest on up to $750,000 in mortgage debt can be deducted • Under the new plan, taxpayers who itemize will be able to deduct • This cap affects home purchases made after December 14, 2017. their state individual income, sales and property taxes up to a limit • A mortgage from December 14 or earlier of $10,000 in total starting in 2018 ($5,000 for individual filers). • deduct interest on up to $1 million in debt (the old cap) • Previously the deduction was unlimited. But filers had to choose to • prior to the new law, interest on up to $100,000 in home equity debt deduct either individual income taxes or sales taxes. For most was also deductible meaning $1.1 million could be claimed. people, deducting income taxes is more beneficial (unless of course you live in a no income tax state). • The new legislation wiped out the deduction for home equity debt, including on existing loans, beginning in 2018 unless used to • In addition, property taxes previously were also entirely deductible. substantially improve home. Charitable Contribution Deductions Schedule A Deductions • Itemized charitable deduction remained unchanged. • Please note that the elimination of unreimbursed employee expenses only affects taxpayers who claim an • However with the higher standardized deduction, this employee-related deduction on Schedule A. may be a mute point. • As a business owner filing a Schedule C or Schedule F, • Filers who plan their charitable gifts may be able to get your business-related deductions are not affected by the themselves over the new standard deduction and elimination of Schedule A deductions. itemize — if they use a strategy called "bunching." 3
1/21/2019 New 1040 New 1040 Federal Estate Tax Federal Exemption was $5,490,000 for 2017. Tax Reform increased limit- $11,180,000 for 2018. Federal Estate Tax Excess taxed at maximum of 40%. Annual gift exclusion is $15,000. Step up in basis has been continued. In 2026, will revert back 2017 levels. Class Life of Assets – Prior to New Tax All assets are placed into an asset class (regardless of the practical or real useful life of the asset. MACRS Classes: 3, 5, 7, 10, 15, 20, 27.5, & 39 Equipment Depreciation 3 year: breeding hogs, non-race horses over 12 years old. 5 year: breeding livestock, goats, dairy cattle, sheep, trailers, computers/calculators, logging equipment, solar property, & farm truck 7 year: farm equipment & machinery, grain bins, fences, office equipment, horses, younger than 12 years old, anaerobic digesters 10 year: greenhouse, single purpose structures, orchards, & vineyards. 15 year drainage tile & paved lots 20 year: farm buildings & storage (apples, onion, potato) 4
1/21/2019 Modified Accelerated Cost Recovery A Comparison of Depreciation Schedules System (MACRS) Year MACRS 150% MACRS 200% Straight ‐ Line General Depreciation System 2018 (1/2 Year) $5,357 $7,143 $3,571 150% Declining Balance- used for farm equipment * 2019 $9,566 $12,245 $7,143 2020 $7,516 $8,746 $7,143 200% Declining Balance 2021 $6,124 $6,247 $7,143 Straight line 2022 $6,124 $4,462 $7,143 Alternative Depreciation System 2023 $6,124 $4,462 $7,143 Straight line 2024 $6,124 $4,462 $7,143 2025 (1/2 Year) $3,062 $2,231 $3,571 For Used Tractor: Purchase Price of $50,000 Changes for Farm & Machinery Depreciation What a Difference a Year Makes Cost recovery period is now 5 years (not 7) for new farm $430,000 new combine purchase with out Bonus or Section 179 Depreciation machinery and equipment. 2017- $46,071 depreciation Grain bins, fences, and used equipment stay as 7 year assets. ($430,000/7 x .5 x 150%) 200% declining balance is to be used on 3, 5, 7 and 10 year property. 2018- $86,000 depreciation ($430,000/5 x .5 x 200%) 150% declining balance on 15 and 20 year property. Trees and vines are 10 year property – previously SL, now 150 DB. $39,929 more A Look Back at Previous Accelerated Depreciation Bonus Depreciation Rules Bonus Depreciation Bonus Depreciation Requirements: Section 179 Recovery period of 20 years or less Original use commenced with Taxpayer. Property required to be depreciated through Alternative Depreciation System (ADS) is not eligible for this deduction. Placed in service before1/1/2020. 5
1/21/2019 Old Phase Out NEW Bonus Depreciation Rules Expands to 100% for next five years. Bonus Depreciation Rules For property placed in service after 9/27/2017. Recovery 50% deduction allowed through 2017 period still 20 year or less. 40% for 2018 Removes requirement that usage must begin with 30% for 2019 taxpayer. 0% for 2020 and later Both new and used equipment is eligible. Family sale restrictions. New Phase Out Section 179-Equipment Expensing Bonus Depreciation Rules Can expense new or used equipment in year of 100% through 2022 purchase. 80% for 2023 Cannot exceed the taxable income derived from 60% for 2024 the business. 40% for 2025 Cannot create a loss. 20% for 2026 0% for 2027 and beyond Section 179-Equipment Expensing Excessive Depreciation Concerns This increase in the rate of depreciation for many farm assets, I.R.C. § 179 deduction was $510,000 with $2,030,000 combined with the shorter MACRS recovery class for new farm phase-out limit ($1 for $1) in 2017. equipment and machinery, may generate more depreciation than is needed by some taxpayers. For 2018, has expanded to $1 million with a $2.5 million The taxpayer can elect to use the SL method of depreciation and dollar phase-out limit ($1 for $1) . now may also elect to use the 150% method. Both elections are Will be indexed for inflation for future years. made on a class-by-class basis each year . To further reduce the amount of depreciation, the taxpayer may elect to use the alternative Provisions are not set to expire. depreciation system (ADS), which calculates depreciation using the SL method and lengthens the recovery period. 6
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