Author: Katie Finnegan-Larson

The Tax Cuts and Jobs Act has several changes for farmers and ranchers.

• Like-kind exchanges, deferral of gain on sale, can only be used for Real Property. Equipment like-kind exchanges are reported as a sale and purchase (2 separate transactions).
  • Equipment trade-in value is the sale price of the equipment. Replacement equipment is valued at the selling price before the trade-in is considered.
• Depreciation rules have changed.
  • New and used equipment purchased in the tax year qualifies for 100% first year bonus depreciation (old rule was new purchases only)
  • If the bonus is not used, Sec 179 is still available for new and used equipment. The limit is $1 million with the phase-out threshold at $2.5 million.
  • Double declining balance depreciation is available for 3, 5, 7 and 10 year property with the repeal of the 150% declining balance depreciation method.
  • The depreciable life for new equipment is 5 years (old rule was 7 years).
  • The depreciable life for used equipment remains at 7 years.
• Real Estate taxes allocable to the business are not subject to the $10,000 limitation, the limitation applies to personal property tax only, deducted on the Schedule A as an itemized deduction.
• Business interest is fully deductible as long as gross receipts are less than $25 million.
• Net operating losses (NOL) have a couple of changes starting after December 31, 2017 and before 2026:
  • NOL generated can carryback up to $500,000 (MFJ) or $250,000 (single).
  • NOL carryback is for 2 years only (was 5 years) for farm and ranch only.
  • NOL carryforward is indefinite (was limited to 20 years).
  • NOL carryforward can only offset 80% of income (prior rules allowed 100%).
• Qualified Business Income Deduction (QBID):
  • The flow-through deduction from cooperatives (formally DPAD), will still be deductible by the individual.
  • The QBID is a deduction against taxable income but does not affect self-employment taxes.
  • The Qualified Business income does not include capital gains (an example would be sale of breeding stock).
  • The simplest explanation for the QBID is 20% of Qualified Business Income (QBI).
    • This method is used when taxable income for a single taxpayer is below $157,500 and married taxpayer is below $315,000.
  • If taxable income is above the thresholds, the initial QBID for each of the taxpayer’s trades or businesses is the lesser of 20% of QBI, or the greater of 50% of W-2 wages, not including commodity wages, or 25% of W-2 wages plus 2.5% of qualified property.
  • Rental income will qualify for the QBI deduction if the property is rented to a commonly controlled trade or business.

The Tax Cuts and Jobs Act has many tax saving features.  We will continue to inform you as the proposed regulations get defined and made permanent.  We would encourage you to visit the KTLLP Tax Team for your tax planning needs before the end of the year.

The recently signed reform bill has changed IRS Code Section 1031 dealing with like-kind exchanges.  Section 1031 is used by taxpayers to defer gain on the sale of property.  Beginning in 2018, the bill limits the use of Section 1031 to only real property, land and buildings.  With this bill taxpayers are no longer able to use the like-kind exchange for personal property such as vehicles, machinery and equipment.  Those that proposed the elimination of like-kind exchanges for personal property stated that it is no longer needed because of the increased expensing provisions through Sec 179 and bonus depreciation.  For the next five years, the bill allows 100% bonus depreciation on eligible personal property whether new or previously owned (used)… In addition, for the next five years, Section 179 will allow full expensing of up to $1,000,000 of eligible personal property.

The rules of a deferred exchange have not changed in that the exchange of real property has to take place with: 1) identifying replacement property(ies) within 45 days from the conclusion of the sale, and 2) completion of the transaction within 180 day from the conclusion of the sale.  As has been the case all along, the monies must remain out of your control and be used to purchase the new property. Any relief of debt would be considered cash received unless on the replacement property there is new debt same as the old debt or in excess.

A couple examples would be:

A rancher trades in old equipment (fully depreciated) for new equipment.  The old equipment is valued at $25,000 in the trade and the new equipment is worth $60,000.

The method used in 2017 would be to reduce the new equipment’s basis to $35,000 ($60,000-25,000) for the cash paid.

With the like-kind exchange option no longer available, the rancher will recognize $25,000 of ordinary income not subject to self-employment tax and would have the new equipment basis be $60,000, the full amount of which will be eligible for expensing either through bonus depreciation or Section 179.  The expense of the new equipment would reduce income subject to self-employment taxes.

Timing of purchases would be important to make the expenses work out.  If the rancher sells the old equipment in year 1, but does not purchase the new equipment until year 2, the rancher would recognize the income in year1 and the depreciation expense would be recognized in year 2.

Please contact our team at Ketel Thorstenson for further inquiries on the Section 1031 Exchange rules.