by Deborah Jeanne Sergeant
Ever-changing tax codes challenge business owners, including growers. That’s why AmericanHort recently presented “Cracking the Code on Taxes that Affect Your Green Industry Business.”
Brice Gibbs, CPA with advisory firm KCoe Isom LLP, works with agricultural business and those in the food and beverage industries. Many are family-owned operations that rely on him as an outsourced CFO. He was introduced by Tal Coley, who serves as AmericanHort’s director of government affairs in Washington, D.C.
“We’re still learning about this tax bill, even a year and a half after its passage,” Coley said. “Now the focus is on temporary provisions: what should be made permanent and what is problematic?”
The major changes affect all taxpayers. For example, the promise was a simpler tax return and permanent changes in the tax rules. Gibbs said that neither of those happened. “Many provisions sunset at the end of 2025,” Gibbs noted.
He also said that many provisions are significantly complex and often open to interpretation by the IRS.
“The devil is in the details with all the schedules attached to it,” Gibbs said. “’Permanent’ only goes as Congress goes. There are still a lot of regulations being passed almost daily by the IRS. The law was passed with 1,097 pages, but it’s open to interpretation by the IRS.”
He added that he receives nearly daily emails about more changes the IRS has made. “We didn’t know how they would play out,” Gibbs said. “Many have been finalized, but there are many more to go. A lot of taxpayers didn’t pay attention to the provisions. Many wanted to wait and see.”
He said the best way to deal with tax reform is to organize. Taxpayers should understand their current situation, research, obtain knowledge, determine impact and identify resources and advisors as guides. They also need to strategize. Identify and analyze challenges and opportunities, brainstorm and create solutions. Assess short- and long-term implications of solutions and strategies developed, tax and otherwise. Optimizing can tailor solutions to match their needs, capitalize on opportunities and mitigate risk and exposure.
“So what happened with tax reform?” Gibbs asked. Rate changes shifted to seven rates and brackets for individuals: 10%, 12%, 22%, 24%, 32%, 35% and 37%. Capital gains and dividends have the same rate structure with the 15% bracket starting at $77,200 (married, filing jointly) and the 20% bracket starting at $479,000 (married, filing jointly). The new rates for C-corporations dropped from the top rate of 35% to a flat 21%.
“Both parties wanted to change the corporate tax rate,” Gibbs said. “They’re much higher than other countries. It’s always about what’s deductible and what’s taxable as well as the rates themselves. Everyone agreed 21% worked out well.”
The alternative minimum tax was repealed, which Gibbs believes can improve the competition in the corporate market. But he cautioned that it’s “’permanent’ until Congress changes it.”
He encourages owners that in-depth analysis is important before they make business changes involving income tax, determine eligibility for governmental programs, or alter their management, ownership, estate or succession plans.
Gibbs related that the 100% bonus depreciation and Section 179 were “a big success.” Now, used qualifying property acquired and placed in service after purchase through 2023 is also eligible. It phases down by 20% each year after 2022 with sunset after 2026. Gibbs said that many states did not conform to this.
Section 179 raises the limit to $1,000,000 with the phase-out above $2.5 million of qualifying asset additions.
“This was a win for most businesses,” Gibbs said. “It’s an investment in technology and infrastructure. It encourages businesses to invest in their businesses.”
Personal property no longer qualifies for like-kind exchange, though real property is still included.
“In tax reform, they took away the lifetime exchange and left it for only real property,” Gibbs explained. “Personal property like trucks, tractors and implements no longer qualify. We can write off 100% of it new or used in the year of acquisition. It’s a net effect of zero on taxable income. It was overall a pretty good idea. The big impact here is it has an impact on self employment tax. It reduces your income tax, and reduces your self-employment tax.”
Gibbs said that “qualified business income” is “Congress’s way to balance what was happening with C-corporations. They were trying to find a way to balance this.”
Ninety percent of tax returns filed in the U.S. are partnerships, S-corps or sole proprietorships. By defining qualified business income (QBI), the pass-through deduction is a deduction that’s lesser of 20% of the combined QBI or 20% of the taxable income, reduced by net capital gain.
“The capital gain rates remain the same, but mostly affected dairy farmers who got tripped up in this,” Gibbs said. “You come up with your taxable income and you have to reduce your taxable income by the capital gain recognized that year.”
Further stipulations apply for businesses with taxable income of more than $315,000.
Gibbs added that the business and pass-through deduction can be complex; however, for some, it can provide tax savings, as long as the business plans carefully. Businesses with multiple streams of income, as well as those planning for succession, may greatly benefit from the guidance of a tax professional.
“Estate planning doesn’t always plan on tax, but succession,” Gibbs said. Many will soon find the need to meet with a tax expert as the Baby Boomer generation retires and hands down their property.
“You’re seeing this transition taking place in all industries,” Gibbs said. “This tax reform will make a difference. What happens in 2020 will also make a difference.”
He urged business owners to consider the following:
“What are the implications of tax reform to me personally?”
“Am I in the most tax favorable entity structure given these changes?”
“How do I determine what changes are needed to maximize my tax benefit?”
Gibbs said the Wayfair Decisions represents another big change affecting producers. On June 21, 2018, the Supreme Court ruled in favor of South Dakota to let states tax remote sales, such as goods sold to out of state buyers on the internet.
“It opened up Pandora’s box for states to go across the border,” Gibbs said.
He recommended businesses look at where they sell goods and whether or not they need to register to do business and collect taxes for goods sold in those states.
“There are still opportunities to take advantage of changes,” Gibbs said. “It’s never too late.” More information is available at info.kcoe.com/2018-tax-reform .