The TCJA and Its Impact to Farmers

Lancaster County is thankful for our rich variety of farmlands, from tomato to dairy with a bit of everything else in between.  The Tax Cuts and Jobs Act (TCJA) has brought about some tax reform changes for our farming neighbors. As many business sectors are experiencing, the changes come in the areas of accounting and depreciation.  Following are some of the pros and cons as outlined by the IRS.

Net Operating Losses can now be carried forward indefinitely as opposed to a previous 20 year limit.  However, these loss deductions are limited to 80 percent of taxable income. The TCJA allows more farms to utilize the cash basis of accounting for taxes.  This change is good for farmers with average annual gross receipts of $25 million or less in the previous three years. For more information on how tax reform impacts farmers accounting, the IRS provides detailed information on their website.

The TCJA also affects how farmers may depreciate their farming business.  The IRS defines depreciation best: “Depreciation is an annual income tax deduction. It allows a taxpayer to recover the cost or other basis of certain property over the time that they use it. When figuring depreciation, taxpayers consider wear and tear, and deterioration of the property, as well as whether it’s now obsolete.”

How does the TCJA alter this depreciation deduction?  The recovery period is now shortened from what was seven years to just five years.  Used equipment and several other categories do remain at seven years, but the switch to five years will have an impact.  At the same time, several positive changes were made to increase bonus depreciation percentages and to expand the definition of what qualifies for bonus depreciation.  Because the number of stipulations and scenarios are so great, we recommend and refer to the IRS site again for more detailed information on exactly what equipment and property is covered.  Still confused after reading all of that information? Our office and phones are open, give us a ring!