Tax reform—commonly referred to as the Tax Cuts and Jobs Act (TCJA)—goes into effect for the 2018 tax year, providing several tax-planning opportunities for food and agribusiness companies.
Below are some of the key federal tax changes impacting these industries as well as further discussion about the potential impact these issues may have on business owners.
C-Corporation Tax Rate
The C-corporation tax rate decreased from a maximum rate of 35% to a flat rate of 21%. Because of this, business owners may want to evaluate whether their current entity structure is still the most beneficial.
Determining the best entity structure for a business is a complicated process with a variety of tax and other issues to consider, such as:
• Double taxation
• Impact of owning appreciating assets—for example, growing operations
• Estate planning and exit strategy
Converting to a C corporation is a relatively simple process that can often be done on a tax-free basis if structured correctly. However, it can be difficult to convert from a C corporation to another entity type without triggering significant tax consequences.
Qualified Business Income (QBI) Deduction
There’s a new 20% QBI deduction available through 2025 for flow-through entities and sole proprietorships. Generally, taxpayers in the business of farming or making a finished food product will qualify for this deduction.
For example, if a pass-through entity generated $500,000 in taxable income in 2018—and all of that income was considered QBI—it’s owner could be eligible for a $100,000—or 20%—deduction. The owner would then only have to pay income tax on the remaining $400,000 of income.
There are some restrictions that could limit a taxpayer’s ability to take this deduction, including limitations on overall income as well as limitations based on the amount of W-2 wages within the applicable business.
Cash Method of Accounting
One of the biggest changes under the new tax law relates to businesses with average gross receipts of less than $25 million. If the business has average annual gross receipts of $25 million or less in the prior three-year period they can use the cash method of accounting. .
There are two distinct advantages to using the cash method of accounting:
• It simplifies a company’s accounting.
• It streamlines how a business accounts for inventory costs from a tax perspective.
A business owner will need to file an accounting-method change Form 3115 to formally adopt the cash method of accounting.
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