By John Alan Cohan
One of the most surprising events of 2017, largely because it survived the political process and was passed quickly, was the new tax law, dubbed the Tax Cuts and Jobs Act (TCJA). The new law has several provisions beneficial the livestock industry. Here’s a brief rundown of the provisions in the new law that affect livestock owners:
1. New deduction for pass-through businesses
The new law changes how “pass-through” entities, such as sole proprietorships, partnerships, S corporations and LLCs, are taxed. This includes 85% of owners in the horse and livestock industries. Now, for the first time ever, the owner’s qualified business income (QBI) from pass-throughs is allowed a 20% deduction, subject to restrictions that can apply at higher income levels. This constitutes a 20% tax cut for pass-through filers.
QBI is generally defined as the net amount of qualified items of income, gain, deduction and loss from any qualified business of the non-corporate owner. QBI does not include certain investment items, reasonable compensation paid to an owner for services rendered to the business or any guaranteed payments to a partner.
Also, the new law provides the top rate on income earned by owners of pass-through business at 37%–which is a slight reduction from the former 39.6% rate.
The pass-through provisions are an incentive for employees to become independent contractors. Many personnel working in the horse and livestock industries are already independent contractors, such as veterinarians, nutritionists, vendors, etc.
2. Immediate expensing and bonus depreciation
For property placed into service in tax years beginning after Dec. 31, 2017, the new law increases the maximum amount a taxpayer may deduct (or “expense”) to $1 million, and increases the phase-out threshold to $2.5 million.
The bonus depreciation deduction for breeding stock, farm machinery and equipment will now be 100%, an increase from the former 50% rate, for property placed in service after Sept. 27, 2017. This applies to new or used property purchased by the taxpayer. Starting in 2023, bonus depreciation will go down to 80%.
3. Estate tax
The long-disputed estate tax has been modified so that the exemption for married couples will be $10.98 million, compared to the former exemption of $5.49 million. This will greatly reduce the number of family businesses susceptible to the estate tax.
4. New corporate tax rate
For operations conducted as C corporations, the new law reduces the corporate income tax rate from 35% to 21%.
5. Limitation on losses
There are stricter rules for deducting losses. The maximum amount of taxable income that can be offset with net operating loss (NOL) deductions is generally reduced from 100% to 80%. NOLs can be carried forward indefinitely. However, NOLs can no longer be carried back to an earlier year, except for certain farming losses, which can be carried back for two years.
MORE FROM FARM PROGRESS: What the new tax plan means for farm families
The “hobby-loss” rules remain the same in terms of the taxpayer’s need to prove that the activity is engaged in for profit if there is a history of losses. This means that, as before, it is important not only to keep records to prepare accurate income tax returns, but to also keep records that measure your activity’s financial performance.
The IRS is already grappling with a prolonged funding cut, a staff reduced by 23% since 2010, and outdated computers. The IRS will need to write countless guidelines and regulations to clarify key terms and concepts in the new law, as well as design new forms. Thus, enforcement and auditing capabilities are likely to drop significantly.
Cohan is an attorney in Encino, Calif., who specializes in horse and cattle tax situations and tax law, among other things. Reach him at www.cohanlawoffice.com