Tax Cuts and Job Act Update
The new Tax Cuts and Job Act includes several changes that may ease the burden on farmers and ranchers.
Tax preparation is often a complicated and stressful task. Occasionally, the law changes and tax regulations seem to work in favor of producers. The new Tax Cuts and Job Act includes several changes that may ease the burden on farmers and ranchers.
The big change is a revision to Section 179.
“Section 179 was enacted to help small businesses,” says Jake Wisdom, Wisdom CPAs. Normally, taxpayers must depreciate the value of a purchased asset over a number of years. Section 179 allows small businesses to deduct all or part of the asset’s value the same year it’s purchased, reducing taxable income.
“The main change for Section 179 in 2018 is the purchase limit phaseouts have increased,” Wisdom says.
Under the previous tax code, Section 179 allowed businesses to deduct up to $500,000 on equipment with a spending limit of $2,000,000. Effective this year, the amounts are increased to allow $1,000,000 in deductions with a spending limit of $2,500,000.
“The main strategy behind Section 179 is to get taxpayers and business owners to purchase assets to stimulate the economy,” Wisdom says.
Other updates include changes to bonus depreciation.
“Bonus depreciation and Section 179 are sisters,” Wisdom said. Bonus depreciation has no limits on deduction or spending amount, but it does limit the deduction percentage. The previous tax code allowed a 50% deduction on new items with a useful life of 15 years or fewer. Now, businesses can deduct 100% of new and used assets with a useful life of 20 years or fewer. This allows businesses to buy less-expensive assets and still get the tax incentive.
These deductions aren’t a free-for-all, though. To qualify for either deduction, all assets must be used for business at least 50% of the time. Assets must also be personal property. Purchases for rental properties are not eligible as deductions for the landowner under Section 179. The business must be profitable that year to claim Section 179 deductions.
Section 179 revisions will remain in effect until a new tax code is written, and bonus depreciation will only last until 2022. Starting in 2023, the bonus depreciation percentage allowed will drop 20% each year. That means by 2027, bonus depreciation will be gone.
“A lot of the Tax Cuts and Job Act is temporary, and it’s phasing out in the future,” Wisdom said.
Wisdom recommends using a licensed professional to assist with tax preparation this year. “There are a lot more factors that have changed this year that make business returns tremendously more complicated,” he said.
Editor’s note: Austin Black is a cattleman and freelance writer from Nevada, Mo.
