*Every effort has been made to ensure the accuracy of the information provided. However, please consult a tax professional to fully examine how these new changes affect your individual operations.

In December of 2017, Congress passed, and

President Trump signed the most sweeping set of

changes to the federal tax code in more than 20

years. Nebraska Farm Bureau (NEFB) worked closely

with Nebraska’s Congressional Delegation to secure

numerous wins for farmers and ranchers as part

of the reforms. As such, the Tax Cuts and Jobs Act

(TCJA) includes several federal tax code changes

that farmers and ranchers need to be aware of as

the end of the year approaches.

5 THINGS TO REMEMBER:

FEDERAL TAX CODE CHANGES FOR FARMERS AND RANCHERS

1 › NEW TAX BRACKETS AND LOWER RATES

All farms and ranches are businesses, but how the business income is reported will depend on how the operation is organized. Those organized as sole proprietorships, partnerships, or S-corporations are considered pass-through entities with their business income reported and taxed on individual returns. Businesses organized as C-corporations will pay taxes as a corporation. Below is a breakdown of the new tax brackets/rates for three categories: individuals, C-corporations, and pass-throughs.

IndividualsThe TCJA continues seven brackets for individuals and all pass-through business income (sole proprietorships, partnerships, and S-corporations) but expands the brackets, lowers tax rates, and indexes the brackets for inflation. The law also doubles the standard deduction to $24,000 and limits itemized deductions. For example, the new law limits the ability to itemize and deduct local non-business property taxes and state income taxes at a combined $10,000 for those who itemize deductions.

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SINGLE

Taxable Income Tax Rate

$0 - $9,525 10% of taxable income

$9,526 - $38,700 $952.50 plus 12% of the amount over $9,525

$38,701 - $82,500 $4,453.50 plus 22% of the amount over $38,700

$82,501 - $157,500 $14,089.50 plus 24% of the amount over $82,500

$157,501 - $200,000 $32,089.50 plus 32% of the amount over $157,500

$200,001 - $500,000 $45,689.50 plus 35% of the amount over $200,000

$500,001 or more $150,689.50 plus 37% of the amount over $500,000

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MARRIED FILLING JOINTLY OR QUALIFYING WIDOW(ER)

Taxable Income Tax Rate

$0 - $19,050 10% of taxable income

$19,051 - $77,400 $1,905 plus 12% of the amount over $19,050

$77,401 - $165,000 $8,907 plus 22% of the amount over $77,400

$165,001 - $315,000 $28,179 plus 24% of the amount over $165,000

$315,001 - $400,000 $64,179 plus 32% of the amount over $315,000

$400,001 - $600,000 $91,379 plus 35% of the amount over $400,000

$600,001 or more $161,379 plus 37% of the amount over $600,000

C-CorporationsThe TCJA sets the corporate tax rate at a flat 21 percent which replaces the 15 percent, 25 percent, 34 percent, and 35 percent brackets under the former code.

Pass-Throughs (sole proprietorships, partnerships, and S-corporations)Section 199A of the TCJA allows pass-throughs to take a business deduction equal to the lessor of 20 percent of their pass-through net income or 20 percent of taxable income minus capital gains. Business income includes payments from cooperatives, commodity wages, and farmland rental income. IRS rules on this section have not been finalized, but the following should apply:

• The deduction will not apply to corporate income.

• Producers who are members of a cooperative can take a deduction equal to any deduction received from a cooperative, plus 20 percent of net farm income, minus the lesser of 9 percent of net farm income or 50 percent of wages paid.

• Producers who sell to a cooperative will not know the full value of their deduction until the cooperative decides what share of the cooperative’s deduction will be retained or passed back to patrons.

• Producers with taxable income above $157,000 per individual or $315,000 on a joint return may be restricted in the amount of deduction they can take. Producers over these thresholds may continue to retain the deduction of 50 percent of wages paid or 25 percent of wages plus 2.5 percent of qualified property if higher.

• Producers who sell to both cooperatives and private companies will need to apportion net farm income between the two sources.

• The deduction is not available to some service businesses, for example, veterinarians with taxable income over $150,000.

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2 › MAKE SURE TO EXAMINE NEW CAPITAL INVESTMENT RULES

Section 179The TCJA permanently increases the Section 179 small business expensing provision from $500,000 to $1 million and is indexed for inflation.

Immediate Expensing (Bonus Depreciation)Farmers and ranchers generally use bonus depreciation when expenditures exceed the Sect. 179 small business deduction limits. All farm structures qualify for the bonus depreciation deduction.

The bill allows businesses to fully and immediately write off business investments through 2022 and expands the deduction to include used as well as new purchases. After 2022, the percentage deduction reduces by 20 percent each year until bonus depreciation is eliminated beginning in 2027.

The TCJA also shortens the depreciation period for farm equipment and machinery from seven to five years.

Section 1031 Like-Kind ExchangesCongress made significant changes to Section 1031 as agricultural businesses can only use exchanges on real property (buildings and land) and cannot be used for machinery or equipment or livestock. It is important for farmers and ranchers to be aware of the changes if they typically use 1031 exchanges especially with equipment.

Farmer A trades a used combine with a fair market value of $100,000 for a newer used combine worth $200,000. Before the TCJA, Farmer A would have had a tax basis of $0 on the old combine (the used combine was fully depreciated) and recorded a basis of only $100,000 on the new combine (the difference between the value of the old combine and value of the new combine). Farmer A would not have been taxed on the value of the trade-in machine. Under the TCJA, when Farmer A files a 2018 federal tax return, the $100,000 trade-in value will be reported as income. The full purchase price of the new combine will also need to be reported ($200,000) and will be subject to depreciation.

*This change would have increased Nebraska Farmer A’s personal property tax bill had NEFB not secured a fix via the Nebraska Legislature to allow for the use of the trade-in value as a credit on the valuation of the new combine vs. paying taxes on the full value of the new combine if Farmer A used Section 179.

EX

AM

PLE

3 › WHILE NOT ELIMINATED, THE ESTATE TAX EXEMPTION IS DOUBLEDIn a big win for farmers and ranchers who have battled the estate tax for decades, the TCJA doubles the base estate tax exemption from $5 million to $10 million and continues to index the exemption for inflation. For 2018, a farmer would be able to pass nearly $11.2 million in net assets to their heirs before the estate is subject to the 40 percent tax rate. However, the increased exemption expires on December 31, 2025. Lastly, the TCJA does not change current stepped-up basis rules.

4 › OBAMACARE MANDATE IS REPEALED & HEALTH CARE DEDUCTION IS MAINTAINED

The TCJA repealed the individual health insurance mandate in the Affordable Care Act by removing the penalty for individuals who do not purchase health insurance. The TCJA also maintains the deduction for medical expenses for those who itemize deductions.

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Working for YouFor those NEFB farm and ranch families

still weighing their health insurance options, we would recommend them visit

with their local Farm Bureau Financial Services agent to learn more about

NEFB’s new large group Association Health Plan in partnership with

Medica. Open enrollment for this new plan began October 1, 2018

and runs through December 1, 2018. To learn more about the plan and see the qualifications,

please visit www.nefbhealth.org.

NEBRASKA FARM BUREAU MEMBER HEALTH PLANSThis is a large group Association Health Plan that is unique and provides

personalized coverage for farmers, ranchers, and agribusinesses. Together, Nebraska Farm Bureau and Medica designed an exclusive portfolio of

coverage options for farmers, ranchers, and those in agribusiness who are looking for health insurance for themselves, their families, and employees.

5 › KEY TAX PROVISIONS FOR FARMERS & RANCHERS MAINTAINED

Farmers and Ranchers Can Still Fully Expense Their Property Taxes

Property taxes on agricultural land and other business property can continue to be fully deducted on a Schedule C, E, or F.

Most Farms and Ranches Can Continue to Deduct Business Interest

The new law continues the interest deduction for businesses with less than $25 million of gross receipts indexed for inflation. Carryover rules are available to apply the excess interest expense to future years.

Cash Accounting Expanded

The law expands the number of farm corporations and farm partnerships with a corporate partner that will be able to utilize cash accounting.

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For more information:

Jay Rempe, Senior Economist (402) 421-4447 - jayr@nefb.org

Jordan Dux, Director of National Affairs (402) 421-4437 - jordand@nefb.org

www.nefb.org