Many farmers and ranchers will benefit from tax law changes brought about by last year’s Tax Cuts and Jobs Act. Below are the key changes, along with details about how they will affect farmers and their bottom line:
Net Operating Losses (NOLs)
- NOLs can now be carried forward indefinitely. Under prior law, they could only be carried forward 20 years.
- NOL deductions are limited to 80 percent of taxable income.
- They can be carried back for two years for farm and ranch businesses. Under prior law, NOLs could be carried back five years.
Qualified Business Income Deduction
For tax years beginning after December 31, 2017, taxpayers other than corporations may be entitled to a deduction of up to 20 percent of their qualified business income from a qualified trade or business, including income from a passthrough entity, but not from a C corporation. This also includes:
- 20 percent of qualified real estate investment trust (REIT) dividends
- 20 percent of qualified publicly traded partnership income
Limitations on the Deduction
The deduction is subject to multiple limitations:
- The type of trade or business
- The taxpayer’s taxable income
- The amount of W-2 wages paid with respect to the trade or business
- The unadjusted basis immediately after acquisition of qualified property held by the trade or business
This deduction can be taken in addition to the standard or itemized deductions. In some cases, patrons of horticultural or agricultural cooperatives may be required to reduce their deduction. The IRS will be issuing separate guidance for co-ops.
Accounting Method Changes
Under the new law, more farm corporations and partnerships can now use the cash basis of accounting for tax purposes.
This includes small business taxpayers, such as:
- Farmers and ranchers with average annual gross receipts of $25 million or less in the prior three-year period.
Frequently Asked Questions
What is the new rule for carrying forward Net Operating Losses (NOLs)?
The Tax Cuts and Jobs Act allows farmers and ranchers to carry forward NOLs indefinitely, a change from the previous 20-year limit. However, NOL deductions are now limited to 80% of taxable income.
Can farmers still carry back their NOLs?
Yes, but only for two years. The carryback period for NOLs related to farm and ranch businesses was reduced from five years to two under the new law.
Who qualifies for the 20% Qualified Business Income Deduction?
Taxpayers other than corporations, such as sole proprietors, partnerships, and S corporations, may qualify if they earn income from a qualified trade or business, including certain REIT dividends and publicly traded partnerships.
Are there any limitations on claiming the Qualified Business Income Deduction?
Yes. The deduction is limited by factors such as the type of business, taxable income, W-2 wages paid, and the unadjusted basis of qualified property. Additional restrictions apply for cooperative patrons.
What are the new accounting method rules for farmers?
More farmers and ranchers can now use the cash method of accounting, provided they meet the small business threshold, defined as having average annual gross receipts of $25 million or less over the past three years.