In light of a few conversations I have had over the past few days, I wanted to send out a brief update on the impact that the recent Tax Cuts & Jobs Act of 2017 (TCJA) had on the agriculture industry and farmers. As many of you know, farmers are afforded very favorable, unique tax benefits and rules due to the seasonal nature of the industry and its overall importance to the American economy.
For example, under the TCJA, farmers are allowed to fully write off “other tangible assets” like trees and perennial bushes immediately in the year the asset was placed in service (until 1/1/2023). Additionally, Internal Revenue Code Section 168 allows for immediate, full depreciation on qualifying asset purchases (think machinery & equipment) up to $1 million (this deduction is limited after certain thresholds). If the purchase of a property is contingent upon certain asset replacements or improvements, it’s important to know that the taxpayer could at least recoup around 20% of the cost of the asset in the year it’s placed in service and before the sale closes.
Another provision in the TCJA allows for any business, including farming business, to use the cash basis of accounting if their average three year revenues are less than $25m. When analyzing or including financials in marketing materials, it’s important to understand the basis of accounting being used. The cash basis of accounting is usually subject to more up’s & downs because revenues and expenses are not matched like they are under the accrual method of accounting. If a farmer just spent a lot of money to set citrus crops right now, it might not be best to include those expenses in the marketing materials because under the cash basis, the revenue would not be recorded until the following year (but the expense would be currently recorded because the cash was paid).
One final area to be aware of is Code Section 263A. For the citrus industry, this code section allows for immediate expensing of the costs of replanting trees when the original trees were lost or damaged due to freeze, disease, drought, or another casualty. Previously, this benefit was only allowed for the taxpayer who experienced the loss. The TCJA added another clause which allows new investors/purchasers of that land to also be able to expense the replacement costs immediately.
These are a few of the main highlights related to tax reform. A working knowledge of the rules will allow you to assess certain opportunities and concerns with about your listings with your SVN Saunders Ralston Dantzler with your advisor, but keep in mind that advanced tax guidance should be provided by a tax professional.
This article should not be construed as, and should not be relied upon as legal or tax advice.
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Tyler Davis is an Accountant with our brokerage specializing in Opportunity Zones as resource for our advisors and clients. Tyler recently joined the brokerage after spending five years in the tax practice as a manager at Pricewaterhouse Coopers in Birmingham, Alabama.