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2018 income tax update
The Tax Cuts and Jobs Act (TCJA) was signed into law on December 22, 2017. Most of the changes took effect in 2018, but there were a few that were retroactive to 2017. TCJA has been promoted as simplifying the tax code and providing tax savings to taxpayers. For the average W2 wage earner, this may be the case. However, for a farmer or business owner, TCJA brings changes that have not made things simpler. Although there may be some tax savings, the complexity of TCJA and Iowa not coupling with some of the new tax law will add a significant amount of time to tax preparation.
The personal exemption deduction was eliminated for 2018. In 2017, this amounted to $4,050 per dependent. To help compensate for eliminating the personal deduction the standard deduction was raised to $24,000 for those filing married filing jointly. A tax payer will now have to exceed $24,000 in order to itemize deductions on Schedule A. Many farmers will not be able to exceed $24,000 and will use the standard deduction of $24,000. Those farmers that will use the standard deduction may want to consider gifting grain to charities rather than giving money. In addition, you are limited to using a maximum of $10,000 of state income taxes paid as an itemized deduction.
The Section 179 Expense Election has been made permanent and is $1,000,000 for federal tax purposes, but Iowa only allows $70,000 in 2018. For a C-Corporation, Iowa only allows $25,000 in 2018. There are phase-out rules for those that purchase an excessive amount of qualifying assets.
Bonus depreciation is 100 percent through 2022. It now applies to both new and used assets. Iowa did not couple with federal on bonus depreciation, so on the Iowa depreciation schedule, assets would be depreciated over their years-of-life.
The class life for machinery has changed. New machinery now has a class life of five years, but used machinery stays at seven years. There is also an option to select 200 percent double declining balance as the method of depreciation or use 150 percent double declining balance, as it was in previous years.
Like-kind exchange rules now only apply to real property transactions, such as farmland. Like-kind exchange rules no longer apply to farm machinery. If a farmer trades tractors and the purchase price of the new tractor is $200,000 and the amount allowed for the trade-in is $100,000, the farmer has to treat the trade-in as a sale and realizes $100,000 of taxable gain. Assuming the old tractor was fully depreciated, the gain will be treated as ordinary gain, not subject to self-employment tax. The farmer will depreciate the full purchase price of $200,000 on the new tractor. Iowa did not couple with the new like-kind exchange rules. So on the Iowa return the farmer will just depreciate the difference paid of $100,000 on the Iowa depreciation schedule and not realize a taxable gain to report.
One of the more complex parts of the new tax law is the 199a deduction. In general, a farmer will get to reduce their Schedule F income by 20 percent and only pay income tax on 80 percent of their farm income. This is a very simple explanation of the 199a deduction. Selling grain to co-ops or having taxable income over $315,000 can complicate the calculations. C-Corporations cannot use the 199a deduction.
These are only a few of the changes for 2018. The Tax Cut and Jobs Act is a very complex tax law. The majority of the new tax provisions end in 2025 and revert to the tax laws in affect in 2017 for the 2026 tax year. Contact your tax preparer for the details that might affect your own operation.
Charles Brown, farm management specialist, 641-673-5841, email@example.com