1. Income Tax Update July 11, 2017 J C. Hobbs - Extension Tax Specialist
OSU Department of Agricultural Economics

2. Presentation Items
Enacted changes for the coming years from the PATH Act 2015
Proposed changes from:
President
House Ways and Means Committee

3. Depreciation Only depreciate the business use portion of the asset
Business use must be greater than 50% in order to use the Section 179 Election.
Asset is sold: depreciation is recaptured as ordinary income in the year of sale.
Asset is traded: depreciation from old assets adjusts the basis of the new asset in the year of the exchange.

4. Depreciation PATH Act For 2017 changes made to:
Additional First Year Depreciation (also referred to as “Bonus Depreciation”)
Section 179 Expensing Election

5. Additional First-Year (Bonus) Depreciation
For 2017, 50% Additional First-Year (Bonus) Depreciation is allowed for qualifying property.
New (never used by anyone) and placed in service through 12/31/2017.
The majority of assets used in agriculture will qualify.
The Percentage allowed will be reduced for both 2018 and 2019.

6. Additional First-Year (Bonus) Depreciation
For 2017: 50% Additional First-Year Depreciation will be allowed.
For 2018: 40% Additional First-Year Depreciation will be allowed.
For 2019: 30% Additional First-Year Depreciation will be allowed.
Expires effective January 1, 2020

7. 50% Additional First Year Depreciation Example
Purchased and placed in service a new tractor in 2017 for $100,000
Farmer elects 50% Bonus Depreciation in the first year and deducts $50,000 (50% of $100,000) of bonus depreciation
Farmer also deducts $5,355 (10.71% of $50,000) of regular deprecation for a total deduction of $55,355 in the first year

8. Section 179 Expensing
Purchased capital assets that are depreciable ( either new or used).
2016: up to $500,000 with a $2,010,000 investment limit.
2017: up to $510,000 with a $2,030,000 investment limit.
2018 and beyond: Indexing was made permanent. Both the amount allowed to be expensed and the investment limit are indexed to inflation annually.

9. Qualifying Property
Tangible personal property: (machinery, equipment, purchased breeding livestock, business vehicles, etc.)
Integral part of production
Storage facility
Single purpose agricultural structure

10. Qualifying Property Qualifying property can be new or used
More than 50% trade or business use (actively farming or materially participating in a rental arrangement)
Cannot create a loss but can offset W-2 wages

11. Section 179 Example Purchased a used tractor for $70,000
Farmer has $90,000 of net farm income
Reduce the $90,000 to $20,000 of net farm income by electing the Sec 179 deduction
Reduces both the income tax and self-employment tax liability

12. Section 179 Investment Limit Example
Custom harvester purchased a several new combines for $2,050,000 in 2017
Investment exceeds limit by $20,000 (2,050,000 less 2,030,000)
Harvester must reduce the his Section 179 amount by $20,000
The maximum amount that be expensed is $490,000 ($510,000 less $20,000)

13. Proposed Changes The proposed provisions are subject to change:
Individual
Business
Estates
Gifts

14. Individual Items Rates changed Eliminate most Itemized Deductions
Simplify higher education tax benefits
Repeal special interest provisions (mortgage deduction for second home)
Eliminate the Alternative Minimum Tax

15. Capital Gain and Qualified Dividends1
Current 2017 Tax Rates
Ordinary Income
Capital Gain and Qualified Dividends1
10% 0%
15%
25%
28%
33%
35%
39.6%
20%
1Qualified dividends are dividends received from a domestic corporation or a qualified foreign corporation.

16. Proposed Tax Rates Ordinary Income Trump Ways and Means Blueprint 15%
0%/12% *
25%
35%
33%
* Current standard deduction would nearly double; $24,000 for married filing joint, $18,000 for head of household, and $12,000 for single and others. This will create a larger zero percent bracket. The % bracket disappears.
Increase the Child and Dependent Tax Credit
Only deductions will be charitable donations and mortgage interest payments.
50% of income from interest, dividends, and net capital gain is not taxed

17. Business Items
Small Business: Limit the tax rate for small business and pass through entities to a maximum of the 25% bracket (33% does not apply to business owners)
Corporations: Flat tax rate of 20% for small business to maximum of the 25% bracket (double taxation bite reduced due only 50% of capital gain and dividends being taxed)

18. Business Items (cont.)
Allow for immediate write-off (no more complex depreciation schedules and rules)
Will not apply to land
Business interest expenses will offset any interest income (limited to interest income)
Net Operating Losses to be only carried forward with no time limit but annual amount limited to 90% of net taxable income

19. Business Items (cont.) Overall a move toward a Cash-Flow tax approach
Levels the playing field so less need for Value Added Tax (VAT) adjustments and Border Adjusted Tax (BAT) with foreign trading partners
Will simplify our international tax rules

20. Estate and Gift Tax Estate Tax to be eliminated
Unknown issue is the handling of Basis for the transferred assets
Step-up to Fair Market Value at date of death, or
Carryover basis from the decedent
Gift Tax has not been addressed, but basis in the asset will likely be an issue

21. Simplification?

22. Historical Marginal Tax Rates (%) (lowest and highest)

23. Survey Link

24. Contact Information
J C. Hobbs
Oklahoma Cooperative Extension Service
Oklahoma State University