By Brian E. Ravencraft, CPA, CGMA is a Principal with Holbrook & Manter, CPAs
While it’s hard to believe harvest season is upon us, we all know year-end tax planning is also just around the corner. If you are an individual business owner or have ownership in a pass-through entity, you should consider revising your 4th quarter tax estimates. In addition to your individual specific situations, taxpayers also need to consider the 2017 Tax Cuts and Jobs Act. This legislation drastically overhauled the tax code for the first time in decades. Many of the changes will directly impact your tax situation for 2018. Some of the highlights are:
- New income tax rates and brackets: While the total number of brackets remains at 7, the top rate will fall from 39.6% to 37%, and the amount of income covered by the lower brackets has been adjusted upward.
- Standard deduction increased: The standard deduction for individuals increases to $12,000 for single filers and $24,000 for joint filers.
- Personal exemptions suspended: In conjunction with increasing the standard deduction and lowing individual tax rates, the new tax act eliminates the personal exemption from 2018 through 2025.
- Child tax credit increased: The child care credit was raised from $1,000 to $2,000 per qualifying child. It also provides a $500 credit for dependents who do not qualify for the child tax credit, including those over 16 years of age.
- State and local (Schedule A) deduction limited: deductions for state and local property plus income or sales taxes is limited to $10,000 annually. Real estate taxes for farmland on Schedule F and rentals reported on Schedule E remain fully deductible.
- Miscellaneous itemized deductions suspended: Deductions for items such as broker investment charges, individual tax preparation fees, unreimbursed employer expenses, and most casualty losses are suspended through 2025.
- Domestic production activities deduction repealed: The DPAD deduction is repealed and replaced by new Section 199A.
- New deduction for pass-through income (section 199A): Ag and horticultural cooperatives will have a new 20% deduction. Schedule F income as well as net cash rental income reported on Schedule E is included in the computation. Beware, the 20% deduction computation has a three prong test, and this computation is not straightforward.
- Enhanced bonus and 179 expense depreciation expense: farmers will be allowed to immediately write off capital purchases as breeding livestock, farm equipment and single-purpose structures (such as milking parlors) up to $1 million. Farmers will also be available to write off 100% of qualified property through 2022, at which point a phase-out occurs thru 2025. The new law expands bonus depreciation to include new and used property purchased or constructed, and to plants bearing fruit and nuts.
When you combine the individual specific changes and the tax law changes there’s a lot of room for potential adjustments. The typical tests that are applied when looking at estimates taxes (and underpayment penalties) are exception 1 and 2. Exception 1 states you need to have 100% of your prior year tax paid in through either withholding or timely estimates. If your AGI in the prior year was greater than $150,000 then you need 110% of your prior year tax paid in. Exception 2 states you need 90% of your current year tax paid in through either withholding or timely estimates. If you’re currently paying quarterly estimates it may be worth reviewing since the above mentioned items can both increase and decrease your overall tax situation.
Remember, early tax planning and projecting can avoid any last minute surprises when filing your 2018 tax returns next year.
Brian E. Ravencraft, CPA, CGMA is a Principal with Holbrook & Manter, CPAs. Brian has been with Holbrook & Manter since 1995, primarily focusing on the areas of Tax Consulting and Management Advisory Services within several firm service areas, focusing on agri-business and closely held businesses and their owners. Holbrook & Manter is a professional services firm founded in 1919 and we are unique in that we offer the resources of a large firm without compromising the focused and responsive personal attention that each client deserves. You can reach Brian through www.HolbrookManter.com or at BRavencraft@HolbrookManter.com.