The 2017 Tax Cuts and Jobs Act contains a number of changes to the way in which farming property is depreciated under MACRS. In addition, the rules for claiming net operating losses are changed.

Depreciation

The two most significant depreciation changes are:

>Increase in the bonus depreciation rate for qualified property from 50 percent to 100 percent, effective for property acquired after September 27, 2017, and

>increase in the maximum annual section 179 allowance from $510,000 to $1 million, beginning in 2018.

Unfavorable recapture rules can apply to section 179 deductions in certain situations.

The annual limitations on depreciation deductions on business vehicles that have a gross vehicle weight rating of 6,000 pounds or less are also substantially increased.

In addition, beginning in 2018, the depreciation period for most types of new farm machinery and equipment is reduced from seven to five years. Farmers are allowed, for the first time, to use the 200 percent declining balance method to depreciate most farming property. Previously, the less favorable 150 percent declining balance method applied.

Business Interest Expense Deduction

The new law also limits business interest expense deductions to 30 percent of taxable income. However, this rule only applies if your average gross receipts in the prior 3 years are $25 million or less.  A farming business may elect out of this interest deduction limitation but in doing so loses the benefit of accelerated depreciation deductions.  All farm property (including farm property placed in service in prior years) with a regular depreciation period of 10 years or greater will need to be depreciated under the “ADS” system using the “straight-line method” (the least favorable method) over longer recovery periods than usually apply. Whether or not to make the election out will largely depend upon comparing the tax costs of losing the benefit of accelerated depreciation and delaying the deduction of disallowed interest.

Net Operating Losses

Finally, NOL farming losses that arise in tax years beginning in 2018 and later may only offset taxable income in two carryback years. The carryback period for earlier farming NOLs was five years. On the plus side, the carryforward period for new NOLs is now unlimited. Previously, the carryforward period was set at twenty years. However, new NOLS will only be able to offset 80 percent of taxable income in a carryforward year. The old rules (five-year carryback, twenty-year carryforward, and 100 percent taxable income offset) will continue to apply to NOLs from prior tax years. Therefore, it will be necessary to maintain good records that distinguish between NOLs subject to the old rules and NOLs subject to the new rules.

NOLs arising in a 2017/2018 fiscal-year are not subject to the 80 percent taxable income limitation. Therefore, it may be preferable for such fiscal-year taxpayers to accelerate expenses, such as bonus depreciation, in order to maximize the 2017/2018 NOL.

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The TCJA made sweeping changes to tax law, impacting virtually every taxpayer. We are focused on the immediate and long-term impact of the TCJA on your situation. Please call our office for guidance on all of the provisions that directly affect you.