As we near the end of the calendar year, it’s a good time to consider strategies that may help minimize your tax liabilities. The possibilities may seem daunting, but they’re second nature to your tax advisor. By getting your finances in order now, you can take advantage of as many opportunities as possible and get through tax season efficiently.
Here are ten areas agribusinesses may want to review with their tax advisor:
Net Investment Tax Income
The Affordable Care Act imposed a 3.8% net investment income tax on individuals whose adjusted gross income (AGI) exceeds $200,000 and couples whose AGI exceeds $250,000. If you are active in your farm business, there are two sources of investment income that may bypass this incremental tax: self-rental income and interest income earned as the farm’s creditor. Your tax advisor can determine if you qualify and help you assemble the appropriate documentation to support your case.
Income Averaging for Federal Returns
Federal statutes allow farmers to spread a portion of their current year farming income equally over the three previous tax years. This is useful if your current year income places you in an unusually high marginal tax bracket or you expect higher rates in the future. Your tax advisor can help you calculate the potential savings and file your Schedule J, if applicable.
New Repair Regulations
IRS regulations now allow businesses to expense asset purchases of $2,500 or less per unit (up from $500 or less). This reduces the time and effort required to track, capitalize and depreciate minor purchases. It also provides an incentive to make year-end purchases, as they can be expensed against income for the current year even if they were only placed in service for a day. Be sure to capture this new threshold in your formal asset capitalization policies.
Expanded Bonus Deprecation on Trees and Fruit Bearing Plants
A tax savings opportunity is available to those who have planted trees and fruit-bearing plants with a pre-productive period greater than two years. Businesses can plant now and take bonus depreciation even before the trees and plants become commercially productive. The available bonus depreciation is 50 percent in 2017, 40 percent in 2018, and 30 percent in 2019.
Transition of Family LLCs
In order to minimize estate taxes, farmers often transfer their land and real property into family-owned LLCs. Minority interests may be granted in these LLCs to their heirs at up to 50 percent of the fair value of the LLC interest, thereby reducing the estate tax impact of the gift. However, if proposed changes to the IRS Code are enacted, this tax planning tool will go away. If you have a family owned LLC, be sure to work with your CPA or estate planning attorney to evaluate the impact of these potential changes and assess any course of action to be taken before year-end.
Entity Structure Planning
The PATH Act of 2015 made permanent the five-year waiting period for built-in gains associated with C corporations that have converted to S corporations. Your circumstances may prove favorable for conversion if you have not done so already.
Surplus Crop Donations
Cash basis growers can deduct 50 percent of the fair market value of donated food to qualified organizations. The recipient must be a qualified tax-exempt organization, and the food must be used for the care of the ill, the needy, or infants.
Benefit Plan Contributions
If you participate in your company retirement plan, then your 401(k) contributions ($18,000 or $24,000 if age 50 or older) must be funded out of your business payroll before December 31, 2017. Review your retirement plan to see if you are taking full advantage of available tax deductible contributions. Changes to improve existing retirement plans, or adopting a new plan before year end can significantly decrease taxable income.
Here are some sample maximum tax deductible contribution amounts by age:
|Age||401k Profit Sharing||Cash Balance||Total|
Oregon Pass-Through Tax Rate
Oregon taxpayers may apply a lower tax rate on active pass-through income received from an S corporation or partnership (other than a single-member LLC). This can only happen if the proper election has been made on the Oregon business tax return to take advantage of the reduced rate. Work with your tax advisor to make the proper filing, as the impact could be as much as 2 percent and cannot be corrected with an amended return.
Tax Filing Deadlines
As you prepare for your 2017 returns, remember partnership returns are due by March 15 and C corporation returns are due by April 15.
We’ve highlighted just a few of the items that should be on your radar as you start planning with your tax professionals. Please contact us if you’d like to review these opportunities or discuss other options for tax savings.
Meet the Author
Curtis Sawyer, CPA
Aldrich CPAs + Advisors LLP
Curtis Sawyer provides farm accounting, tax compliance, planning, and agribusiness consulting services to his clients in the agriculture industry. He works closely with businesses across several industries with an emphasis in agriculture, farming, cooperatives and food-processing, as well as closely-held businesses and their owners. Curtis also presents on topics including regulatory reform and tax savings…
- Agribusiness consulting
- Farm accounting
- Closely-held businesses
- Certified Public Accountant
- Strategic tax planning and compliance