May 25, 2018
CURIOUS ABOUT THE SECTION 199A 20% TAX DEDUCTION? WE’LL WALK YOU THROUGH IT
Now that the proverbial dust has settled on the announcement of the new tax legislation, the Section 199A code is shaping up to be advantageous for many growers and farming operations.
In general, eligible farmers will now receive a hefty 20% tax deduction on qualifying income. Farms and growers eligible for the deduction include entities organized as S-corporations, sole proprietorships, LLCs, and partnerships. Collectively, these are referred to as “pass-through entities” in the tax act. This new tax deduction replaces the former Domestic Production Activities Deduction (DPAD) which was repealed by the new tax act.
“As growers and producers, many of our ag clients are impacted by the repeal of DPAD” says Partner and CPA Jeff Bowman. “However, we’ll hopefully see our clients receive greater deductions through the new Section 199A code. Why the recent controversy around Section 199A? The original text of the law allowed growers to benefit more by selling to a co-op than directly to a processor. The legislation has since been modified, but it did provide some extra complications.”
Section 199A Provision
Farmers organized as a “pass-through entity” qualify for Section 199A deduction of 20% of their farming income. However, like most “gifts” from the government, there are strings attached and many limitations. If you have more than $315,000 in total income, you’ll be subject to potential limitations based on the amount of wages paid and/or capital invested in the business. “While challenging to calculate in some cases, we are working with our clients now to plan how to best maximize this new deduction,” says Bowman.
The 20% deduction under Section 199A will directly reduce the taxable income of the individual owners of the operation. Contact your accountant now to review the potential benefits of this deduction for 2018. In some cases, this deduction along with the reduced federal tax rates may be sufficient to offset the loss of state tax deductions.
The Section 199A provision does not apply to C Corporations. However, Congress enacted other provisions reducing the tax rates applicable to C Corporations, and thus Section 199A was seen as an attempt to “level the playing field” between C Corporations and other types of entities.
In past years, clients might have structured their operations with multiple entities to alleviate liability risk or gain efficiency with a shared labor or equipment entity. Tax changes such as the Section 199A for pass-through entities, and lower tax rates for C Corporations, may warrant a different type of entity structure. And as always, while income tax planning is a critical step, there may be other factors in play such as limiting liability exposure or minimizing estate taxes.
As always, we welcome the opportunity to discuss how these tax changes impact you and your farming concern. Contact Jeff Bowman or any member of our ag team.