Yes, Virginia, there really is a Santa Claus. However, nobody expected him to be dressed in a suit and tie and acting like a politician. But Christmas came early for cattle producers as President Trump promised to sign the tax package into law today.
Is it tax reform or tax relief? For cattle producers, it’s a little of both, but the semantics don’t really matter. What does matter is that the conference committee tax package passed Tuesday by the House of Representatives and late last night by the Senate is overall a really good deal for cattle producers.
Take, for example, Section 179 deductions for equipment and other goods. Beginning in 2018, that deduction is increased to $1 million indexed for inflation, doubling the current $500,000 limit, says Danielle Beck, NCBA director of government affairs and the association’s tax specialist. The current $2 million dollar-for-dollar phase out is bumped to $2.5 million, she adds.
For cash accounting, the eligibility threshold is increased to $25 million, a significant increase from the current $5 million. “It applies to corporations, farm partnerships with a corporate partner and family farm corporations,” Beck says.
Regarding interest deductions, the final package maintains the small business exclusion of $25 million gross receipts, three-year average, for businesses, Beck says. “Anyone with gross receipts under that number will be able to continue deducting without having to make any sort of an election,” Beck says. Businesses that exceed that threshold, like cattle feeders, can continue deducting interest without any restriction, but will have to give up 100% bonus depreciation in exchange.
However, NCBA’s main concern in the tax package, the estate or death tax, got a reprieve and not a repeal. “Unfortunately, we weren’t able to get full, permanent repeal, but they do double the exemption rates,” Beck says. “So upon enactment, those rates go from $5 million for an individual to $10 million, indexed for inflation. For couples, it will go from $10 million to $20 million, also indexed for inflation.”
That exclusion will be in place for eight years. In 2026, it will revert to the current levels of $5 million for an individual and $10 million for couples.
According to the ag accounting firm K·Coe Isom, there are five year-end strategies that ag producers, consulting with their tax advisors, should consider in light of the new tax package. They are:
1. Defer income to next year and pay deductible expenses this year. Depending on your individual circumstances, you could have lower tax rates in 2018.
2. Pay all assessed 2017 property tax and any likely amount of personal 2017 state income taxes. Note, however, that payments could be subject to limitations if you are subject to the alternative minimum tax.
3. Make year-end purchases of new and used equipment. Under the tax bill, 100% bonus depreciation starts for property placed in service on or after Sept. 28, 2017. This includes used equipment so there could be advantages to year-end purchases.
4. The ability to carryback net operating losses for farming operations will be reduced from a five year carryback to two years after 2017, so this year will be your last opportunity to recoup some income taxes from five years ago.
5. Make your charitable donations in 2017. If you are going to make charitable donations in 2018, consider making some or all of them in 2017 in case your standard deduction is more beneficial next year.
In addition to year-end tax planning, K·Coe Isom recommends that businesses take a fresh look at their operations in 2018 and think about whether restructuring or adjusting operations will make sense in light of the changes in this bill.
The House passed the conference committee bill 227-203 and the Senate passed it 51-49, largely along party lines. There are those who aren’t happy with the bill, especially politicians who believe they can spend your money more wisely than you can. If your senator(s) and representative voted for the bill, be sure to give them a call or send an email thanking them for their vote and wishing them a Merry Christmas. They deserve a pat on the back.