The tax bill Congress passed generated lots of headlines on how the tax cuts affect big business. But small entrepreneurs, including agricultural producers and farmers, are also coming out winners.
The effects aren't fully known — and the IRS has yet to create regulations to parse the language of the new tax code. As tax season enters full swing (and planting season approaches), here are some broad strokes of the new law and how it may impact farmers.
The co-op loophole
One unintended effect of the Tax Cuts and Jobs Act gives co-ops and farmers a big advantage in Section 199A. Basically, it makes it more profitable for farmers to sell grains to a co-op than an investor-owned entity.
This is how it works: When selling to a private company, the farmer can claim a 20 percent deduction on the net proceeds. But selling to a co-op lets them claim a 20 percent deduction on the gross sale, which nets a tax benefit that could be as much as five times greater than selling to a private entity.
Farmers are scrambling to redo their marketing plans and sell more grains to co-ops. That means private companies are scrambling to establish co-ops.
Congress could pass legislation to eliminate or reduce the co-op advantage. But the Minnesota Farmers Union urges Congress to make Section 199A permanent to “keep the competitive balance between corporations and cooperatives.”
Other ag-friendly tax code changes
Income tax rates: Tax reduction of 15-25 percent for married couples drawing income between $20,000 and $400,000.
Equipment: Turns out, 2018 may be a great year to purchase new equipment or machinery, because the limit for expensing equipment has doubled to $1 million in 2018. That makes the purchase of applicable farming equipment completely deductible, putting more money in your pocket.
Estate tax: Not only was it doubled to $11 million per person or $22 million per couple, it’s now indexed to inflation.
Meet with your accountant or tax professional to help you plan and understand what the new tax structure means to you and your operation, so you can keep as much money as possible in your pocket.
If the time is right to refinance, or to purchase new vehicles or equipment, meet with a lender at Minnwest Bank. We can help you put together a loan that helps you meet your operation’s needs.