Those in farming and various other businesses tied to agriculture may experience some changes due to the 2018 farm bill, depending on their specific operation. The formal name for this bill is the Agricultural Improvement Act of 2018. This bill was signed into law at the end of 2018, and most of the provisions and funding for programs will remain in effect until 2023 or longer. The USDA has published a summary that details most of the important changes and how they will affect certain farmers. Here are a few highlights to the bill changes:

Some highlights include:

• Emergency programs for livestock, bees, and farmed fish will continue without much change.
• The Conservation Reserve Program has an increased acreage cap which will move up to 27 million acres in 2023. Included are pilot programs for long term, 30-year contracts and short term, 3-5 year contracts.
• Price Loss Coverage (PLC) and Agricultural Risk Coverage (ARC) remain
• Both crop insurance and the SNAP program are mostly unaffected and will proceed as under the previous legislation with comparable levels of funding.

The government has budgeted over $400 billion to be spent under this new bill, divided into broad areas which are classified as nutrition, crop insurance, commodities, conservation, and other needs.

The main differences between the 2018 bill and the previous 2014 farm bill are decreases or increases in spending in certain areas, different ways of collecting and managing data, and some programs have not received re-authorization.

Important changes

Agricultural Risk Coverage will now be based on a trend adjusted yield that should result in higher guarantees for farmers. Crop insurance as a whole will receive more accurate data from the USDA-RMA and become a more advanced form of risk management.

Base acre reallocation is not allowed at all under the new bill, which will prevent farmers from legally increasing the base number of acres counted on their land.

PLC and ARC elections will be made for 2019/2020 and then annually for 2021-2023 versus a 5-year election in the previous farm bill.

ARC coverage is now tied to physical county instead of administrative county.

There are new rules and regulations for updating PLC payment yields. Even though a farmer/landowner may be utilizing ARC instead of PLC it is still in their best interest to update their PLC payment yields.

The Conservation Stewardship Program or CSP has been modified from an acre-based program to a dollar-based program.

Loan amounts related direct farming programs have been increased, allowing farmers to borrow more under various credit title programs.

Payment Limitations remain at $125,000 per year. If the payment limitation is being reached it is time to consult with a tax professional to structure entities to obtain more payment limits.

The overall policy of the bill is meant to compensate for lower income levels of many farms in recent years and adjust regulations to compensate for disruptions to agricultural exports. In other words, the government is trying to help farmers earn more or maintain their income levels through more precise regulation. This is partially meant to compensate for recent trade disputes and tariff issues with countries such as China and Mexico that have affected farmers.

In summary, the new farm bill should not have much of a negative effect on most businesses. It seems that loan amounts have been increased, terms for risk management have become more favorable, hemp has been legalized, and most previous programs will continue as in place with little change or disruption. Some farmers may be affected by the new regulations for conservation or base reallocation, but it seems that any impact will be minor or insignificant. Livestock farmers will also probably continue operations as before without noticing any changes in their day to day operations. Anyone concerned about changes in the bill should do some specific research or consult with a legal professional about how their operations will be affected, but it seems that the coverage and commentary surrounding these recent changes has mostly been positive.

Jim Honz, Lutz Tax Shareholder, was recently featured on the Nebraska Grain & Feed Association’s (NEGFA) website for an article about the Tax Cuts and Jobs Act (TCJA) relating to the agriculture industry.

“In December 2017, Congress passed the Tax Cuts and Jobs Act (TCJA), a once-in-a-generation tax bill that provides many generous tax reductions, including lower federal income rates, 100% expensing of depreciable personal property, larger tax credits for children, virtual elimination of the Alternative Minimum Tax, expanded use of Cash Method of Accounting, and a doubled estate tax exemption. It’s almost as if Congress made paying taxes voluntary. Said another way, if you’ve paid taxes on your 2018 return, you didn’t plan hard enough to avoid them.

Businesses seeking to grow and expand can take advantage of the 100% expensing election that applies not only to new property, but also used property. It applies to nearly all business property except land (of course), building structures and property purchased from related parties. Even land improvements such as parking lots, fencing, drainage and irrigation systems, and landscaping are eligible for immediate expensing.” 

Jerad Knott, Lutz Grand Island Tax Shareholder, was recently featured in Nebraska Cattleman, January 2019, Volume 75.

“The Tax Cuts and Jobs Act of 2017 contains numerous provisions that impact the agriculture industry. No provision has created more uncertainty and questions than IRC Section 199A, commonly referred to as the qualified business income (QBI) deduction. But for all the uncertainty created, the opportunities it affords for tax planning are numerous. This article describes the deduction itself and then explores some of the more confusing and uncertain areas of the deduction.

In the simplest of terms, 199A allows for a deduction from taxable income of 20 percent qualified business income for taxpayers other than C Corporations. For married individuals with taxable income under $315,000, or single filers under $157,500, the deduction is 20 percent of taxable income excluding capital gains.”

VIEW THE FULL ARTICLE!

• 50% of gross income must be in production agriculture or agribusiness
• Must have less than 50 employees
• Full-time employees are eligible
• Must be a Nebraska Farm Bureau member since 7/1/2018 to qualify for 2019
• Must become a Farm Bureau member by 7/1/2019 to qualify for 2020

In 2017, Congress passed changes to tax laws that will significantly affect trades of agricultural machinery and equipment. Before you can fully understand how the new laws will affect your farming operation, you need to take a look at the past law.

Previous Laws Related to Capitalization of Boot on a Trade

Prior to 2018, when machinery or equipment was traded for like property, no gain or loss was recognized on the trade as the trade was considered to be a like-kind exchange. The boot on the trade plus any remaining basis of the traded asset would be capitalized and depreciated over the useful life of the asset or accelerated depreciation could be taken using bonus depreciation (if the asset was new) or Section 179. Let’s look at an example:

Farmer John trades a tractor for a new model. The old tractor has a fair market value (trade value) of $90,000 and the new tractor has a fair market value of $150,000. The old tractor has been fully depreciated and has zero remaining basis. Under the old tax law, Farmer John would depreciate the boot of $60,000 paid on the trade of the tractor. No gain would be recognized on the trade value of $90,000.

Capitalization of Traded Personal Property Under the New Tax Law

Under the new tax law, personal property is no longer eligible for like-kind exchange treatment. Therefore, when machinery or equipment is traded for like property, gain or loss will be recognized on the traded asset, and the full cost of the new asset will be depreciated over its useful life or accelerated depreciation can be taken using bonus depreciation (on new or used property) or Section 179. Let’s look at an example under the new tax law:

Assume the same facts as above.  In this situation, Farmer John will recognize a gain of $90,000 on the trade of the tractor. He will then depreciate the full $150,000 cost of the new tractor using regular depreciation, bonus depreciation, Section 179, or any combination thereof. With the ability to use bonus depreciation and Section 179, Farmer John will be able to reach the same outcome as he would of under the old tax law.

How Recent Changes Will Effect Personal Property Taxes

Under personal property tax law, the cost of the personal property asset listed on the federal depreciation schedule is used as the cost of the asset for personal property tax purposes. Under the old tax law, when there was a trade for like property, the boot on the trade was capitalized, and therefore, was the cost of the asset for personal property tax purposes. However, under the new tax law, the full cost of the asset will be reported on the federal depreciation schedule, and therefore, the full cost of the asset will be reported for personal property tax purposes. Let’s look at an example of the effect on personal property tax using the same facts as above:

Under the old tax law, Farmer John would have added the new tractor on his personal property tax return at a cost of $60,000 (the boot on the trade). However, under the new tax law, the new tractor will be capitalized at the full cost of $150,000. This will be the value used for personal property tax. As you can see, this has a negative effect by adding an additional $90,000 of value to the personal property tax return.

The Nebraska legislature did enact a change to the personal property tax laws in 2018 that effectively will continue to allow like-kind exchanges on personal property, but only for property expensed under Section 179 during 2018 or 2019.

“For purchases of depreciable personal property occurring on or after January 1, 2018, and before January 1, 2020, if there is an election to expense the depreciable property under Section 179 of the code and similar personal property is traded in as part of the payment for the newly acquired property, the Nebraska adjusted basis shall be the remaining net book value of the property traded in, plus the additional amount that was paid by the taxpayer for the newly acquired property.”

Now that the rules have changed, you may need to provide additional information to your tax preparer, including invoices from your machinery and equipment trades/purchases.  Changes in tax laws make it more important than ever for the owners/operators of ag-related businesses to communicate with their tax preparers.