Month: December 2018

Farmers and ranchers should be aware of changes in how they depreciate their farming business property. These changes took effect in 2018 as a result of tax reform legislation passed in December 2017.

Depreciation is an annual income tax deduction that allows a taxpayer to recover the cost or other basis of certain property over the time that they use it. When figuring depreciation, there are a number of factors that should be taken into consideration such as wear and tear and deterioration of the property, as well as whether it is now obsolete.

Here are nine facts about these tax law changes to depreciation that could affect farmers and their bottom line:

1. New farming equipment and machinery is five-year property. For property placed in service after December 31, 2017, the recovery period is shortened from seven to five years for machinery and equipment.

2. The shorter recovery period does not apply to grain bins, cotton ginning equipment, fences, and other land improvements.

3. Used equipment remains seven-year property.

4. Property used in a farming business and placed in service after December 31, 2017, is not required to use the 150-percent declining balance method. 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.

5. 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.

6. 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. These amounts ($1 million and $2 million) will be adjusted for inflation for taxable years beginning after 2018.

7. The new law increases the bonus depreciation percentage from 50 percent to 100 percent for qualified property acquired and placed in service after September 27, 2017. The bonus depreciation percentage for qualified property that a taxpayer acquired and placed in service before September 28, 2017, remains at 50 percent. Special rules apply for longer production period property and certain aircraft.

8. The definition of property eligible for 100 percent bonus depreciation was expanded to include used qualified property acquired and placed in service after September 27, 2017, as long as certain requirements are met.

9. 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 provision applies to tax years starting in 2018 and refers to property such as single purpose agricultural or horticultural structures, trees or vines bearing fruit or nuts, farm buildings, and certain land improvements.

Questions? Don’t hesitate to call.

• By Leon Clinton
• December 22, 2018

The Rehabilitation Tax Credit offers an incentive for owners to renovate and restore old or historic buildings. Tax reform legislation passed in December 2017 changed when the credit is claimed and provides a transition rule, which is summarized below:

1. The credit is 20 percent of the taxpayer’s qualifying costs for rehabilitating a building.

2. The credit doesn’t apply to the money spent on buying the structure.

3. The legislation now requires taxpayers take the 20 percent credit spread out over five years beginning in the year they placed the building into service.

4. The law eliminates the 10 percent rehabilitation credit for pre-1936 buildings.

5. A transition rule provides relief to owners of either a certified historic structure or a pre-1936 building by allowing owners to use the prior law if the project meets these conditions:

• The taxpayer owned or leased the building on January 1, 2018, and the taxpayer continues to own or lease the building after that date.
• The 24 or 60-month period selected by the taxpayer for the substantial rehabilitation test begins by June 20, 2018.

6. Taxpayers should use Form 3468, Investment Credit, to claim the rehabilitation tax credit in addition to a variety of other investment credits.

Please call if you have any questions about this tax credit.

• By Leon Clinton
• December 20, 2018

Dollar limitations for pension plans and other retirement-related items for 2019 are as follows:

In general, income ranges for determining eligibility to make deductible contributions to traditional Individual Retirement Arrangements (IRAs), to contribute to Roth IRAs, and to claim the saver’s credit all increased for 2019. The contribution limit for employees who participate in 401(k), 403(b), most 457 plans, and the federal government’s Thrift Savings Plan also increases from $18,500 to $19,000. Contribution limits for SIMPLE retirement accounts for self-employed persons increase in 2019 as well – from $12,500 to $13,000.

Traditional IRAs

The limit on annual contributions to an IRA increases from $5,500 to $6,000. The additional catch-up contribution limit for individuals aged 50 and over is not subject to an annual cost-of-living adjustment and remains $1,000.

Taxpayers can deduct contributions to a traditional IRA if they meet certain conditions; however, if during the year either the taxpayer or their spouse was covered by a retirement plan at work, the deduction may be reduced, or phased out, until it is eliminated, depending on filing status and income. If a retirement plan at work covers neither the taxpayer nor their spouse, the phase-out amounts of the deduction do not apply.

Here are the phase-out ranges for 2019:

• For single taxpayers covered by a workplace retirement plan, the phase-out range is $64,000 to $74,000, up from $63,000 to $73,000.
• For married couples filing jointly, where a workplace retirement plan covers the spouse making the IRA contribution, the phase-out range is $103,000 to $123,000, up from $101,000 to $121,000.
• For an IRA contributor who is not covered by a workplace retirement plan and is married to someone who is covered, the deduction is phased out if the couple’s income is between $193,000 and $203,000, up from $189,000 and $199,000.
• For a married individual filing a separate return who is covered by a workplace retirement plan, the phase-out range is not subject to an annual cost-of-living adjustment and remains $0 to $10,000.

Roth IRAs

The income phase-out range for taxpayers making contributions to a Roth IRA is $122,000 to $137,000 for singles and heads of household, up from $120,000 to $135,000. For married couples filing jointly, the income phase-out range is $193,000 to $203,000, up from $189,000 to $199,000. The phase-out range for a married individual filing a separate return who makes contributions to a Roth IRA is not subject to an annual cost-of-living adjustment and remains $0 to $10,000.

Saver’s Credit

The income limit for the Saver’s Credit (also known as the Retirement Savings Contributions Credit) for low- and moderate-income workers is $64,000 for married couples filing jointly, up from $63,000; $48,000 for heads of household, up from $47,250; and $32,000 for singles and married individuals filing separately, up from $31,500.

Limitations that remain unchanged from 2018

• The catch-up contribution limit for employees aged 50 and over who participate in 401(k), 403(b), most 457 plans and the federal government’s Thrift Savings Plan remains unchanged at $6,000.

Don’t hesitate to contact the office if you have any questions about retirement plan contributions.

• By Leon Clinton
• December 18, 2018