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.
Section 179 Deduction and Bonus Depreciation
Tax reform included significant changes to Internal Revenue Code Section 179, Election to Expense Certain Depreciable Business Assets, such as:
• Expensing limit doubled and is now at $1 million, beginning January 1, 2018.
• Phase-out threshold increased to $2.5 million, beginning January 1, 2018.
Additionally, tax reform included significant changes to bonus depreciation:
• Bonus depreciation percentage doubled to 100%.
• Definition of qualified assets revised to include used assets.
These new bonus-depreciation rules became effective for assets acquired and placed into service after September 27, 2017.
Increasing a Loss
The benefit of Section 179 can only be realized if an entity or taxpayer has taxable income—in other words, a taxpayer can’t use Section 179 to further increase a loss.
However, taxpayers can use bonus depreciation regardless of whether they have taxable income, which means they can employ it to increase a loss.
Assets Exceeding $2.5 Million
Once a taxpayer has eligible asset additions in excess of $2.5 million, the allowed Section 179 expense is reduced dollar for dollar. This means a taxpayer with $3.5 million in eligible asset additions wouldn’t be able to take a Section 179 deduction.
This isn’t the case with bonus depreciation. A taxpayer can take bonus depreciation on all eligible assets with no limit on the deduction or amount that’s taken.
Preproductive Costs
Bonus depreciation may not be available for certain agribusiness assets, depending on whether a taxpayer chooses to expense preproductive costs or capitalize those costs into the basis of the crop. Preproductive costs are defined as the farming costs incurred from the date a crop is planted in the ground through the date of harvest of the first commercially harvestable crop.
A taxpayer that elects to expense preproductive costs is required to depreciate farming assets using the alternative depreciation system method, which means using longer lives—also referred to as a time span—for depreciation.
It’s important for a taxpayer to understand which method of accounting for preproductive costs is used because this will impact the taxpayer’s ability to use bonus depreciation for further development or potential acquisitions.
Next Steps
Food and beverage company owners can benefit from performing a detailed analysis of their company’s specific situation to determine which, if any, actions to take. For more information on how tax reform may impact your business, visit www.mossadams.com/taxreform.
Mrunal Patel has practiced public accounting since 2000. He has experience in providing tax services to both public and private companies in the food, beverage, and agribusiness industries as well as to apparel, manufacturing, and distribution clients. He can be reached at (818) 577-1864 or [email protected].
Assurance, tax, and consulting offered through Moss Adams LLP. Investment advisory services offered through Moss Adams Wealth Advisors LLC. Investment banking offered through Moss Adams Capital LLC.
