This is the first of a two-part series focusing on tax savings, planning opportunities, and other tax considerations for farmers and agriculture businesses for year-end 2019. Part I focuses on when a farming taxpayer has higher than expected earnings in 2019 while Part II, which will be published on AgFuse.com in early December 2019, will focus on tax planning opportunities when a farmer has lower than expected current year performance.
When considering tax planning opportunities for year-end 2019, taxpayers should first take a step back and analyze their current year performance. Were your current year earnings higher than expected, or were they lower than expected? How did your crop perform this year relative to prior years? Did you have any unexpected or non-recurring gains or losses during the year? These are all great questions to be asking your CPA as you move into these critical final two months of 2019.
The first step for year-end tax planning is to understand the new rules that were enacted as part of the Tax Cuts & Jobs Act of 2017 which was passed on December 22, 2017. A number of these rules were effective on January 1, 2018 while the full phasing in of other provisions was delayed until 2019 or beyond. One of the major provisions modified by the Tax Cuts & Jobs Act of 2017 was the “full expensing” provisions found in Internal Revenue Code Section (IRC) 179. This provision allows for the full expensing of qualifying asset purchases by certain trades or businesses. In layman’s terms: you can fully depreciate and deduct qualifying purchases in the first year. Certain taxpayers can purchase qualifying depreciable property and, rather than spreading the deduction out over a number of years, this code section now allows you to fully depreciate the asset in the year of purchase. The deduction is phased out after a certain dollar threshold. For 2019, the current maximum Section 179 deduction is $1 million with a phase out threshold beginning at $2.5 million. If your current year earnings are higher than expected and your CPA advises you that you are going to have to pay a larger than expected tax bill, one way to reduce your tax burden is to accelerate qualifying Section 179 expenditures into 2019. If a taxpayer was planning a large equipment or machinery purchase in 2020, it might make sense to accelerate that purchase into 2019 in order for the deduction to count on your 2019 tax return.
Another tax planning opportunity, if outperforming expectations for the year, is to accelerate the payment of expenses into 2019 rather than waiting until 2020 to make payments. If operating on a cash basis rather than an accrual basis this decision could have a major impact. Likewise, postponing the completion of major sales or deals into early 2020 rather than having them completed by year end is another worthwhile consideration. Farmers are afforded more flexibility than most taxpayers in planning the timing of their recognition of income and deductions. One of the major tax planning opportunities for farmers is the ability to make an income averaging election, which is discussed in detail in "The Top 10 Accounting & Tax Benefits for Farmers & Farming Businesses." As discussed in this article, Certain qualifying farming businesses can elect to be taxed on an average tax rate of their running three years of income. This election, which is calculated on Schedule J of an individual's Form 1040 can have huge implications if a farming business has extremely high profits in one year compared to previous years where they were subject to a lower tax bracket. This decision allows a taxpayer to spread the tax impact of an unexpected or non-recurring income year over three tax periods. If your current year earnings are much higher than previous tax years, making this election might be an item to consider.
Taxpayers should also be aware of non-farm specific tax planning opportunities. If a taxpayer has more income than expected in 2019 due to capital gains generated by the sale of equipment or a non-farm asset, perhaps the taxpayer could trigger an unrealized capital loss before year end. Capital losses are only able to be utilized to the extent you have capital gains. Any capital loss not used to offset capital gains is only allowed to offset $3,000 of ordinary, non-capital income during the year. The remaining unused capital loss is carried forward to offset future capital gains, if available. The same $3,000 ordinary income limit is applied in each future year that the capital loss is carried forward.
Another way to potentially reduce your tax burden if you have had a better year than expected in 2019 is to contribute money into an Individual Retirement Account (IRA). There are two different types of IRA: a ROTH IRA and a traditional IRA. A ROTH IRA uses post-tax dollars while a traditional IRA uses pre-tax dollars. This means, for a ROTH IRA, you pay the tax today on the dollars used to fund the investment rather than in the future, when you cash out the ROTH IRA. However, for a traditional IRA contribution, a taxpayer can receive a tax deduction currently, but pay the tax on the back-end when the IRA is ultimately cashed out. The traditional IRA is the best of the two for our fact pattern. If a taxpayer has extra funds due to a great 2019 year, transfer those funds into a traditional IRA. Depending on the taxpayer’s income level, he or she might be able to take a current year tax deduction for their IRA investment. The full tax deduction for a traditional IRA contribution is subject to the following limits in 2019: $6,000 contribution per person ($7,000 if over 50 years old) if a single filer and make under $64,000 or $103,000 if married filing jointly. The deduction for a traditional IRA contribution is fully disallowed if the taxpayer makes more than $74,000/single or $123,000/married filing jointly during 2019. If the taxpayer’s income falls in between the two thresholds depending on their filing status, then the taxpayer will receive a partial deduction. For further details, please see this IRS chart
One final tax planning opportunity relating to capital gains triggered in 2019 is to put those capital gains in a Qualified Opportunity Zone Fund. As long as a taxpayer reinvests capital gains (just the gain portion, not principal amount) in a qualified opportunity zone fund, they can defer the tax due on these capital gains until December 31, 2026 and reduce the capital gain tax owed at that point by 15%. The biggest advantage of the Opportunity Zone program is tax free appreciation on qualifying investments. However, for purposes of this article, the main benefit is the ultimate deferral of capital gains that would otherwise be due in 2019. While the Opportunity Zone program is still being developed for agricultural land, the rules are clear for putting money in an Opportunity Zone fund that is invested in a qualified trade or business. Deferring tax and reducing the ultimate tax owed is a great, new tax planning opportunity if you have realized capital gains during 2019.
Tax planning is critical to the success of a business and overall cash flow. Whether your business is operating as a partnership, sole proprietorship, or corporation, there are a number of different tax planning opportunities to consider as you enter the last few months of 2019.
This article should not be construed as, and should not be relied upon as legal or tax advice.
Tyler Davis is a CPA who works for SVN: Saunders Ralston Dantzler real estate as an asset manager. SVN: Saunders Ralston Dantzler is leading agricultural land brokerage based in Lakeland, FL. He also owns his own CPA Firm, Tyler Davis CPA where he provides tax preparation, consulting, and provision services. Tyler can be contacted at email@example.com.