February 5, 2019
Tax Changes: A Timely Reminder About New Ag Rules
Last year, we alerted you to tax law changes that will affect the ag industry. Since then, we’ve received a bit more guidance from the IRS about how to interpret and apply some of these laws, especially Section 263A and Section 199A. Here’s what we know now.
Section 263A and pre-productive development costs.
The requirement under Section 263A to capitalize the costs of developing and caring for an orchard or vineyard during the pre-productive years has long been a thorn in the side of many farmers. These costs are significant and paying them without a current tax deduction has been a challenge for many clients. Finally, some relief is in sight.
Under the revamped Section 263A, growers with gross revenues under $25 million may expense cultural costs accrued during a young orchard’s pre-productive period as ordinary farm operating costs. Trees and vines must still be capitalized, as well as the associated costs to plant and get them in the ground. Your accountant will need to file extra forms with the IRS to notify the agency that you are changing your method of accounting for these costs. Talk with your ag CPA to determine if and when to make these changes.
A new Section 199A.
The old Section 199 Domestic Production Activities Deduction (DPAD) has been retired and replaced with Section 199A, which provides a 20 percent deduction on qualified business income from pass-through entities and individual activities.
There’s a wrinkle if you receive income from sales to a cooperative. The calculation now involves a potential deduction passed from the co-op to you, if the co-op chooses, and then a lesser calculation based on your own income but with a reduction based on wages.
However, if the co-op is on a fiscal year end (instead of a calendar year end), your accountant will need to make additional adjustments to calculate the 199A deduction based on how the co-op calculated their final DPAD deductions for the fiscal year. There may be a few extra details needed this year from you or your co-op to property calculate the maximum deductions.
What if you sell to both co-op and non-co-op buyers? Get your spreadsheets warmed up, because there will be some cost allocations to make to determine the net income and resulting 20 percent deduction on both co-op and non-co-op portions of your overall income.
Final regulations for Section 199A have just been released as of this writing, so we are reviewing those new rules to see if there are any further changes.
The final form of these regulations may change yet again. We’ll continue to work to get answers and will share any new information with you. As always, please call your accountant if you have any questions — we’re happy to work through the changes with you.