Two tax code changes in the tax package passed last December by Congress are receiving much attention in the countryside. The first change concerns the tax treatment of producers’ sales to coops. The second concerns the loss of the Section 1031 exchanges for farm machinery and equipment. Let’s examine these changes in more detail.
Section 199A of the tax code contains two deductions which could affect taxes paid by farmers and ranchers: a “regular” deduction and a “coop” deduction. Under the regular deduction, producers can deduct 20 percent of any “pass-through” income from a Schedule F, Subchapter S, or partnership from taxable income. Limits to the deduction apply to incomes above $315,000 for those filing joint returns, and the deduction is limited to 20 percent of the net of taxable income less capital gains and cooperative distributions. Under the coop deduction, producers who sell to a coop, and are members of the coop, can deduct 20 percent of total payments received from coops from taxable income. The deduction is limited to 100 percent of the net of taxable income minus capital gains. Note, the deductions are only applicable if a producer has taxable income and producers can only utilize one of these deductions, and not both. Finally, the Section 199A deduction does not reduce self-employment income.
The future of the coop deduction is very much in flux. The IRS has not issued final rules and private grain companies are lobbying Congress hard to remove the provision. The Congressional authors of the deduction have admitted it was not their intent to give coops a competitive advantage and have pledged to find a solution. Yet it remains to be seen whether the political leverage can be mustered to enact a change in Congress.
The federal tax bill also eliminated Section 1031 exchanges on personal property including tractors, combines, tillage equipment, etc. Removal of the 1031 exchange was a trade-off to the increased expensing levels contained in the bill for bonus depreciation and Section 179. There are a couple implications of this change that producers should be aware. First, the elimination of 1031 exchanges on equipment can have implications for self-employment taxes. Since the trade-in value received on equipment will now be treated as ordinary income, and the depreciation expense is still reported on Schedule F, there will be a reduction in self-employment taxes. Second, because of how Nebraska determines the taxable value of personal property, the removal of Section 1031 exchange will increase the taxable value on new equipment purchases and consequently, the amount of personal property taxes paid.
As always, changes in the federal tax code will affect each taxpayer and farm or ranch operation differently given their unique circumstances. Before making any dramatic changes to a farm or ranch operation or marketing plans, producers should always discuss such changes with a tax preparer or accountant.
Jay Rempe is the senior economist for Nebraska Farm Bureau. Rempe’s background in agricultural economics, years of experience in advocating at the state capitol, and a firm grasp of issues allow him to quantify the fiscal impact of a regulatory proposal, and provide an in-depth examination of key issues affecting Nebraska’s farmers and ranchers.