Monday, November 12, 2018

Tax reform changes to depreciation deduction affect farmers’ bottom line

Last year’s Tax Cuts and Jobs Act made changes to how farmers and ranchers depreciate their farming business property. 
Depreciation is an annual income tax deduction. It allows a taxpayer to recover the cost or other basis of certain property over the time that they use it. When figuring depreciation, taxpayers consider wear and tear, and deterioration of the property, as well as whether it’s now obsolete.
Here is information about how the tax law changes to depreciation affect farmers and their bottom line:
  • New farming equipment and machinery is five-year property. This means that for property placed in service after Dec. 31, 2017, the recovery period is shortened from seven to five years for machinery and equipment. 
  • The shorter recovery period does not apply to grain bins, cotton ginning equipment, fences and other land improvements. 
  • Used equipment remains seven-year property.
  • The 150-percent declining balance method is not required for property used in a farming business and placed in service after Dec. 31, 2017. Farmers and ranchers must continue to use the 150-percent declining balance method for property that is 15 or 20 years old to which the straight-line method does not apply and for property that the taxpayer elects. 
  • New and certain used equipment acquired and placed in service after September 27, 2017, qualifies for 100 percent first-year bonus depreciation for the tax year in which the property is placed in service. 
  • A taxpayer may elect to expense the cost of any section 179 property and deduct it in the year the property is placed in service. The new law increased the maximum deduction from $500,000 to $1 million. It also increased the phase-out threshold from $2 million to $2.5 million. For taxable years beginning after 2018, these amounts of $1 million and $2.5 million will be adjusted for inflation.
  • The new law increases the bonus depreciation percentage from 50 percent to 100 percent for qualified property acquired and placed in service after Sept. 27, 2017. The bonus depreciation percentage for qualified property that a taxpayer acquired and placed in service before Sept. 28, 2017 remains at 50 percent. Special rules apply for longer production period property and certain aircraft.
  • The definition of property eligible for 100 percent bonus depreciation was expanded to include used qualified property acquired and placed in service after Sept. 27, 2017, if several factors are met.
  • Farming businesses that elect out of the interest deduction limit must use the alternative depreciation system to depreciate any property with a recovery period of 10 years or more. This is property such as single purpose agricultural or horticultural structures, trees or vines bearing fruit or nuts, farm buildings and certain land improvements. This provision applies starting in tax year 2018.

New IRS publication helps taxpayers Get Ready for tax reform

The IRS issued a new publication to help taxpayers learn about tax reform and how it affects their taxes. Taxpayers can access Publication 5307, Tax Reform Basics for Individuals and Families, on IRS.gov/getready.
While last year’s Tax Cuts and Jobs Act includes tax changes for both individuals and businesses, this publication is specifically geared to individual taxpayers. It breaks down the law in easy-to-understand language. The publication highlights the changes that taxpayers will see on their 2018 federal tax returns they file in 2019.
This new publication provides important information about:
  • Increasing the standard deduction
  • Suspending personal exemptions
  • Increasing the child tax credit
  • Adding a new credit for other dependents
  • Limiting or discontinuing certain deductions
Taxpayers can also go to IRS.gov/getready to find other information about tax reform. This includes the steps taxpayers can take now to help make filing their taxes smoother next year. Following these steps will also help taxpayers avoid surprises when they file their returns.

Here’s how tax reform changed accounting methods for small businesses

The Tax Cuts and Jobs Acts – better known simply as tax reform – allows more small business taxpayers to use the cash method of accounting. Tax reform now defines a small business taxpayer as a taxpayer that has average annual gross receipts of $25 million or less for the three prior tax years and is not a tax shelter.
Here’s how last year’s legislation changed the rules for small business taxpayers. The law:
  • Expands the number of small business taxpayers eligible to use the cash method of accounting by increasing the average annual gross receipts threshold from $5 million to $25 million, indexed for inflation.
  • Allows small business taxpayers with average annual gross receipts of $25 million or less for the three prior tax years to use the cash method of accounting.
  • Exempts small business taxpayers from certain accounting rules for inventories, cost capitalization and long-term contracts.
  • Allows more small business taxpayers to use the cash method of accounting for tax years beginning after Dec. 31, 2017.
Revenue Procedure 2018-40 provides the procedures that a small business taxpayer may use to obtain automatic consent to change its methods of accounting to reflect these statutory changes.

After tax reform, many corporations will pay blended tax rate

Last year’s tax reform legislation replaced the graduated corporate tax structure with a flat 21 percent corporate tax rate. This new maximum tax rate for corporations is effective for tax years beginning after Dec. 31, 2017.
A corporation with a fiscal year that includes Jan. 1, 2018, will pay federal income tax using what is called a blended tax rate. They will not use the flat 21 percent tax rate for their entire fiscal year. To calculate their blended tax rate, these corporations will:
  • First calculate their tax for the entire taxable year using the tax rates that were in effect prior to the Tax Cuts and Jobs Act.
     
  • Then calculate their tax using the new 21 percent rate.
     
  • Proportion each tax amount based on the number of days in the taxable year when the different rates were in effect.
     
  • Take the sum of these two amounts, which is the corporation’s federal income tax for the fiscal year.
The blended rate applies to all fiscal year corporations whose fiscal year includes Jan. 1, 2018.  Fiscal year corporations that have already filed their federal income tax returns that do not reflect the blended rate may want to consider filing an amended return.
This change will affect many tax forms and instructions that corporations use. For a complete list, see the 2017 Fiscal Tax Year Filers Must Use Blended Corporate Tax Rates page on IRS.gov.

Taxpayers who have an ITIN set to expire should renew it ASAP

Taxpayers with expiring Individual Taxpayer Identification Numbers should submit their renewal applications as soon as possible. Failing to renew them by the end of this year will cause refund and processing delays in 2019.
ITINs are used by people who have tax filing requirements under U.S. law but are not eligible for a Social Security number. The IRS mailed more than 1.3 million letters to taxpayer households that includes someone with an ITIN to remind them to renew. Here are details about whose ITINs are expiring and how someone renews their ITIN.
  • ITINs that expire at the end of this year have middle digits 73, 74, 75,76, 77, 81 and 82 – for example: 9NN-73-NNNN
  • Those who must renew their ITIN can choose to renew their family’s ITINs together, even if family members have an ITIN with middle digits other than 73, 74, 75, 76, 77, 81 or 82. Family members include the tax filer, spouse and any dependents claimed on the tax return.
  • Taxpayers with ITINs set to expire at the end of the year with a need to file a tax return in 2019 must submit a renewal application. Others do not need to take any action.
  • Taxpayers whose ITINs expired due to lack of use should only renew their ITIN if they have a filing requirement in 2019.
  • To renew an ITIN, taxpayers must complete a Form W-7 and submit all required documentation.
  • Although a tax return is normally attached to the Form W-7, a taxpayer is not required to attach a return to ITIN renewal applications when renewing early.
  • There are three ways to submit the W-7 application package. A taxpayer can:
    • Mail the Form W-7, along with original identification documents or copies certified by the issuing agency, to the IRS address listed on the Form W-7 instructions.
    • Work with Certifying Acceptance Agents authorized by the IRS to help them apply for an ITIN.
    • Call and make an appointment at a designated IRS Taxpayer Assistance Center instead of mailing original identification documents to the IRS. When making an appointment, the taxpayer should let the telephone assistor know the visit involves an ITIN renewal application.
In addition to English and Spanish, ITIN materials are available in Chinese, Korean, Haitian Creole, Russian and Vietnamese.