March 2018 KFMA Newsletter (Web Version)

How Do You Manage the Variability and Risk in Agriculture?

Kevin Herbel- KFMA Administrator

There is much variability and risk in the agriculture industry.  Price variability, weather and yield variability, international trade issues, changes in technology, changes to the tax code having direct impact on marketing and entity planning decisions, legal matters, financial management risks, and relationships between business partners and family members.  Farmers make decisions in an uncertain, risky, ever changing environment.  How do you manage and make decisions in the midst of the variability and risk that is before you?

Many of us first think of production and price risk when considering risk management.  Production planning and enterprise diversification of your operation, crop rotation, crop insurance, and hedging and forward contracting are some of the strategies available as you consider management in these areas.  What do you use as a guide in making these decisions?  Regardless of how you manage the finances on your farm, in a period of tight margins and cash flow constraints, financial management decisions increase in importance for farm managers.  There is tremendous variability between farms, in their financial position and cost structure, and in decision-making.  This variability means there is room for you to change your situation for the better.  However, before you can improve you must know where you stand.  Having a solid set of records, and benchmarking with those records to identify strengths and weaknesses, is the place to start in developing a risk management plan for your operation.  This will allow you to focus your management efforts and to base your decisions on your information, your resources and your circumstances.  As a farm decision maker, you need to know your cost structure and to explore the markets that are available to you.  Don’t rely on what someone else says it costs to produce the products you raise.  Know your costs and use your costs as you make these decisions.  Proactively manage the financial aspects of your farm or ranch.  Seek to know and understand your business better than anyone else.  The investment of your time into this process is very important as you seek to manage today’s environment successfully.  Please let us know if we can help you in this process…we would welcome the opportunity!

Kevin


Tax Cuts and Jobs Act

Mark Dikeman - KFMA Associate Director

On December 22, 2017, the President signed tax reform legislation into law.  The Act was promoted as tax simplification, which would potentially allow you to file your tax return on a postcard.  While there has been some simplification, mostly due to elimination of some tax provisions, the Act contains a significant number of tax changes that have created questions, comments, and confusion.  How often does simplification create confusion?

In this article, we will look at some of the key income tax provisions contained in the Act which might affect the average Kansas agricultural producer.  As you read about these tax law changes, be sure to evaluate the new tax provisions as a whole rather than worrying about the impact of one change by itself.  Be aware that many of the provisions contained in the Act are short-term in nature, with many of the changes expiring in 2025.

The Act is often incorrectly referred to as the Tax Cuts and Jobs Act.  Due to a technicality, the short name was dropped which left an official title of An Act to provide for reconciliation pursuant to titles II and V of the concurrent resolution on the budget for fiscal year 2018.  In the spirit of simplification, throughout this article, the Act will be referred to as TCJA.

Individual Income Tax Provisions

Tax Brackets

For each filing status, tax brackets and marginal tax rates were adjusted.

Married Filing Joint:

Old Tax Law

 

New Tax Law

If Taxable Income is:

Marginal Tax Rate is:

 

If Taxable Income is:

Marginal Tax Rate is:

Greater than:

But less than:

 

Greater than:

But less than:

0

19,050

10%

 

0

19,050

10%

19,050

77,400

15%

 

19,050

77,400

12%

77,400

156,150

25%

 

77,400

165,000

22%

156,150

237,950

28%

 

165,000

315,000

24%

237,950

424,950

33%

 

315,000

400,000

32%

424,950

480,050

35%

 

400,000

600,000

35%

480,050

+

39.6%

 

600,000

+

37%

 

Single:

Old Tax Law

 

New Tax Law

If Taxable Income is:

Marginal Tax Rate is:

 

If Taxable Income is:

Marginal Tax Rate is:

Greater than:

But less than:

 

Greater than:

But less than:

0

9,525

10%

 

0

9,525

10%

9,525

38,700

15%

 

9,525

38,700

12%

38,700

93,700

25%

 

38,700

82,500

22%

93,700

195,450

28%

 

82,500

157,500

24%

195,450

424,950

33%

 

157,500

200,000

32%

424,950

426,700

35%

 

200,000

500,000

35%

426,700

+

39.6%

 

400,000

+

37%

 

The following charts allow a comparison between the old law and the new.

 

 

Personal Exemptions

With the TCJA, personal exemptions were eliminated for tax years 2018 through 2025.  Under prior law, a taxpayer, their spouse, and each dependent would have been allowed a personal exemption of $4,150 in 2018.  For a family of four, this will result in an increase in taxable income of $16,600 in 2018.  For reference, personal exemption amounts are reported on line 42 of your 2017 Form 1040.

Standard Deduction

The standard deduction was increased to $24,000 for married taxpayers and to $12,000 for single taxpayers for tax years 2018 to 2025.  This will decrease taxable income by $11,000 for a married couple ($5,500 for a single taxpayer) when compared to the old law.  This increase will make it more difficult for a taxpayer to itemize deductions.  See line 40 of your 2017 Form 1040.

Itemized Deductions

In addition to the increase in the standard deduction (which makes itemizing deductions much more difficult under the TCJA), several significant changes were made to itemized deductions for tax years 2018 through 2025.

The change that seems to have generated the most discussion (and confusion) is the $10,000 limit on deductions for home real estate tax, non-farm personal property tax, and state income tax or local sales tax. See lines 5-8 on your 2017 Schedule A (if applicable). This does not impact the deduction for real estate tax paid on agricultural land or personal property tax paid on farm business property.

For tax years 2018 through 2025, you will not be able to deduct mortgage interest paid on home equity loans (loans not for home purchase or remodel).  Additionally, the amount of mortgage interest you can deduct may be limited if the mortgage was incurred before December 15, 2017 and the balance is greater than $1,000,000.  For loans beginning after December 15, 2017, your mortgage interest deduction may be limited if the loan exceeds $750,000.  See lines 10 and 11 on your 2017 Schedule A (if applicable).

Prior to the TCJA, the deduction for charitable contributions of cash was limited to 50% of adjusted gross income.  Contributions beyond this limit were carried forward and could be deducted in future years.  The TCJA increases this limit to 60% of adjusted gross income.  However, the TCJA eliminates any deduction for mandatory contributions to university funds that give you seating preference (such as KSU’s Ahearn Fund).  See line 16 on your 2017 Schedule A (if applicable).

Miscellaneous itemized deductions, which are subject to a 2% of adjusted gross income floor, will no longer be allowed.  This includes, among other things, unreimbursed employee expenses, tax preparation fees, safe deposit box rental, investment fees, and legal expenses.  See lines 21-27 on your 2017 Schedule A (if applicable).

For 2017 and 2018, medical expenses that exceed 7.5% of adjusted gross income will be allowed as an itemized deduction for all taxpayers.  Prior law used a 7.5% floor for taxpayers 65 and older and a 10% floor for taxpayers under 65.  See lines 1-4 on your 2017 Schedule A (if applicable).

Alimony

Alimony payments made under a divorce decree signed after December 31, 2018 are not deductible.  Alimony received under the same decree will no longer be taxable income to the recipient.  Current law will continue to apply to decrees signed before 2019.  Deductions for alimony paid is reported on line 31a of Form 1040.

Child Tax Credit

For tax years 2018 through 2025, the TCJA doubled the child tax credit from $1,000 to $2,000 per qualifying child (<17 years old) as well as significantly increased the income threshold where the credit begins to phase out.  Under prior law, a phase-out of the child tax credit began once adjusted gross income reached $110,000 for a married couple.  Under the TCJA, the credit phase-out will begin at $400,000, making the credit available to a much larger number of taxpayers.  See line 52 on your 2017 Form 1040 or Form 8812.

Prior law allowed the child tax credit to only offset income tax.  A second credit, called the additional child tax credit, allowed taxpayers with earned income (W2, Schedule F, Schedule C) to offset other taxes (such as self-employment tax) or to receive a refund when income tax liability was less than the total child tax credit available.  It appears the TCJA maintains this earned income requirement and limits the refundable amount of the credit to $1,400 per qualifying child.  See line 67 on your 2017 Form 1040 or Form 8812.

The new tax law also creates an additional, nonrefundable credit of $500, which is available for dependents who do not meet qualifications for the child tax credit.

Business Provisions

Net Operating Loss

A farm net operating loss (NOL) may be created when farm expenses exceed farm income and there is not enough income from other sources (such as wages or rent) to offset that loss.  Under the previous law, farm NOLs could be used to offset income that had been taxed in previous years, starting with the fifth year prior.  If looking back 5 years was not favorable, farmers had the option to either carry the loss back 2 years or to carry it forward.

Under the new tax law, farm NOLs in 2018 through 2025 will automatically be carried forward with an option to carry the loss back 2 years.  However, for NOLs created after 2017, the amount of income that can be offset may be limited to 80% of the taxable income in that year.

Business Deduction 199A

The TCJA eliminated the Domestic Production Activity Deduction (§199) and replaced it with a §199A deduction.  The §199A deduction created significant confusion and many questions from agricultural producers, grain buyers, and agricultural tax professionals.

The new deduction is available from 2018 through 2025 and allows taxpayers to take a deduction of 20% of qualified business income, subject to limitations.  Qualified business income is defined as the net amount of qualified income, gain, deduction, and losses with respect to a trade or business.  For an agricultural producer, a simplified definition of qualified business income might be the sum of net income from Schedule F, their share of farm income from a partnership or S corporation, and gain from Form 4797 resulting from equipment or breeding livestock sales.

Qualified business income does not include capital gain or other investment income, but appears to include §1231 gain from the sale of raised breeding livestock even though it is taxed as capital gain.  Expect more clarity on this and other §199A questions in the future.

As originally written, the TCJA separated patronage dividends from other farm income when calculating the qualified business deduction.  The TCJA, as passed in December, allowed a deduction of 20% of net farm income minus patronage dividends while also allowing a deduction of 20% of gross patronage dividends paid from a cooperative.  This would have created a significant deduction for agricultural producers who sold crops to a cooperative when those sales were treated as per-unit retain allocations by the coop.  In many cases, the deduction would have eliminated taxable income for farmers who sold a significant portion of their crop to cooperatives.

Although common sense would suggest that individuals in Congress would read and understand something as significant as tax legislation before voting on it, that did not happen.  As it turns out, the deduction of 20% of cooperative patronage dividends, which encouraged farmers to sell grain to coops versus private companies, was not what Congress intended.  A technical correction was included in the Omnibus spending bill passed by Congress and signed by the President on March 23, 2018. 

In a way, this “fix” brings back the §199 deduction and combines it with the §199A deduction.  The correction allows agricultural producers to take a deduction of 20% of qualified business income minus the smaller of 9% of qualified business income attributable to cooperative dividends or 50% of wages paid.  Producers who sell to cooperatives (and have employees) should be able to deduct a minimum of 11% (20% minus 9%), subject to certain limitations.  Producers who do not sell to a cooperative or do not have employees should qualify for a 20% deduction, subject to certain limitations.  In any case, the qualified business income deduction is limited to taxable income minus capital gain and may be reduced for a producer (filing joint) with taxable income above $315,000.

Like Kind Exchange (§1031 Exchange)

A like kind (or §1031) exchange allows businesses to structure a disposition of property as a “trade” in order to defer recognition of gain.  This “trade” may involve two parties (like an equipment dealer and their customer) who exchange similar property along with cash.  A “trade” may also be possible when property is not directly exchanged between the two parties if a qualified intermediary is involved.  This intermediary holds onto cash or property for either of the other parties, which may allow one of the parties to delay recognition of income.

Without a §1031 exchange, the asset given up in a “trade” is treated as though it is sold for the trade allowance which, in most cases, will result in a taxable gain.  In that situation, the depreciable basis of the new asset is equal to the trade allowance plus any boot paid or trade difference.

The TCJA eliminates the ability to utilize a §1031 exchange for any business assets other than real property.  As a result, all machinery, equipment, or breeding livestock given up in a trade will be treated as sold for the amount allowed on trade.  Because of increased §179 limits and expanded special depreciation allowance (bonus depreciation) rules, most producers will not see a change in overall taxable income.

Be aware that this change has the effect of moving income from Schedule F, which is subject to self-employment tax, to Form 4797, which is not.  For many agricultural producers this will likely mean that years with large equipment trades will not generate self-employed income and may reduce or eliminate the ability to contribute to retirement plans, deduct self-employed health insurance, or receive future Social Security benefits.

Depreciation

The TCJA contains numerous changes to depreciation that will affect farm tax returns.  Before discussing these changes, it is important to understand that accelerating depreciation, depreciating using a different method, or changing depreciable life of assets does not necessarily change the total amount of depreciation taken on a given asset, rather it adjusts the timing of the depreciation deduction.

Additional first-year depreciation, known as bonus depreciation, has been expanded to 100% (from 50%) for assets placed in service after September 27, 2017 and before 2023.  Assets placed in service after 2022 are eligible for reduced bonus depreciation (80% in 2023, 60% in 2024, 40% in 2025, 20% in 2026).  Under the old law, bonus depreciation applied to NEW business assets with a depreciable life of 20 years or less (which includes farm buildings).  The new provisions allow bonus depreciation to be used on new or used assets with a life of 20 years or less.

The §179 deduction limit was increased to allow an immediate write off up to $1,000,000 (up from $510,000 in 2017) on certain depreciable farm property.  The phase-out limitation was increased to $2,500,000 (up from $2,030,00 in 2017).  While this may seem like a generous amount available to accelerate, the elimination of the like-kind exchange provisions for non-real estate property will increase the need to use either bonus depreciation or §179 deduction in order to maintain a given level of taxable income.  Through 2022 or 2023 or 2024, this may not be an issue while high levels of bonus depreciation are available.  However, in future years when bonus is reduced or eliminated $1,000,000 of §179 may not be enough in years when multiple pieces of high value equipment are traded.

Prior to the TCJA, farmers were required to use the 150% declining balance method while non-farm businesses are allowed to use 200% declining balance, which results in more depreciation early in the life of an asset.  The TCJA removes the requirement to use 150% declining balance for most 3, 5, 7 and 10 year assets.  The Act also shortens the depreciable life of new farm equipment from 7 to 5 years.

Many changes are made with the implementation of the TCJA. While there is certainty and the ability to understand many of the provisions, some of the provisions (particularly §199A) will require further guidance from the IRS to know how the law will be applied. Consult with your tax advisor as more becomes known regarding the TCJA. Remember to consider all economic and other management impacts as decisions are made and don’t make major management decisions based on the income tax aspects alone.


A New Year, A New Team Member

Anthony Ruiz - KFMA Professional Development Offices

Just like that it is 2018! Along with a new year, KFMA added a new face; me. My name is Anthony N. Ruiz and I joined KFMA at the end of December. With the holidays and other activities, January saw me begin, in earnest, as your Professional Development Officer. I am based out of Manhattan in the K-MAR 105 office. My task is to help your local, friendly Ag Economist do what they do, better. I am here to serve each Ag Economist to grow in their knowledge and skills, listen to their needs, and foster lifelong learning within our family of Ag Economists, office staff, and you the KFMA member. I do not take my tasks lightly and humbly commit myself to getting better each, and every, day.

As a child growing up in south-central Oklahoma I knew early on a career in agriculture was my destiny. 4-H and FFA activities filled my time and allowed me to explore my passion for production agriculture. Raising and exhibiting livestock and giving speeches were my favorite activities. These passions led me to attend Oklahoma State University and graduate with a Bachelor’s degree in Agricultural Education. Along with my degree from OSU, I graduated from Texas Christian University’s Ranch Management Program. After briefly working in energy production, I accepted a position in Central Kansas District as a Livestock Extension Agent for K-State Research and Extension.

Being a part of extension introduced me to KFMA and the tremendous work they perform. During my tenure as a Livestock Extension Agent, I often recommended KFMA membership and services to stakeholders. KFMA’s vast, accurate data pool and annual summary meetings were crucial to projections, business plans, and solutions I developed with producers. To be a part of KFMA’s team while putting my passion for agriculture, commitment to lifelong learning, and education to use was an opportunity to leap at.

2018 will be a year of firsts. First time sitting in with Ag Economists on member check-ins. First time teaching a lesson on farm accounting programs. Our new administration’s first major tax legislation. First time I almost drove off with my phone on top of the car roof in front of my new coworkers. As we march forward and experience 2018’s firsts, seconds, and millionths, let us resolve to make it our best yet. In business, relationships, or personally, use 2018 to embrace the new and make the previous better.


Economist Spotlight

Ashley Poston

Ashley Poston shines in this issue’s Ag Economists Spotlight. She serves Southeast Association KFMA members as Executive Economist based in the El Dorado office. This Oxford, Kan. native now calls the quaint community of Cassody, Kan. home. Ashley and husband, Landon, have three young daughters. Keira, 9, Rylee, 4, and Madison, 1. They are active in basketball, soccer, and cheerleading. When not attending after school activities and sporting events Ashley and Landon raise Quarter Horses for ranch work with some help from the family pony, Twinkie. If you notice some extra shine in this month’s spotlight, it is probably the jewelry, spurs, and other artistic designs Ashley and Landon create through their side venture, Double P Silver.

This is Ashley’s third season in El Dorado. Previously, she worked in the KFMA South Central office in Hutchinson for three seasons. Ashley graduated from Oklahoma State University with a Bachelor’s in Accounting and Master’s degree in Agricultural Economics. Her Master’s work focused on rural impact which led to a position with OSU Extension continuing her work in rural impact before joining the Hutchinson team of Ag Economists.

In six years with KFMA, Ashley enjoys developing relationships with families, getting to know them better, and understanding their needs. This allows her to learn their goals, help members plan for the future, and pursue those goals. Her favorite part of the job is when members achieve goals and reach their operation’s vision. Whether you are in the Southeast Association or not, give Ashely Poston a call or shoot her an email to say hello and talk about the finer points of raising three little girls or pony husbandry.


Trenton Hargrave

In the outskirts of Randolph, Kan. is where we meet up with KFMA Ag Economist Trenton Hargrave. A graduate of Blue Valley High School and K-State University he is passionate about both working with producers and cheering on the K-State Wildcats. Serving in the North-Central Association since early 2013, Trenton enjoys assisting farmers and making their operations more successful. He knows the joys and struggles of an agrarian life from growing up on a commercial cow-calf operation just outside Randolph. When not serving members, Trenton can usually be found on his family farm making sure things run smoothly or at a K-State Football game. Trenton’s wife, Lynn, is a key part of making the family business successful. Extra help around the farm is on the way as this spring; Trenton and Lynn are expecting a child. Give Trenton a call today to say congratulations or send him an email this week to reminisce on the football victory over Nebraska in 1998, his favorite ever.


March 2018 KFMA Research Highlights

The following research articles can be found on the KFMA webpage (www.AgManager.info/kfma/research-articles) or look under “KFMA Research”.  Each newsletter will feature new publications that are available. 

An Analysis of Family Living in Kansas

Gregory Ibendahl - K-State Agricultural Economics

Amidst declining net farm income levels from the last several years family living costs have began to drop. However, the drop in family living has not matched the drop in net farm income. Looking at KFMA data his article examines some of the reasons why living may be slow to decline.

Differences Between High-, Medium-, and Low-Profit Cow-Calf Producers: An Analysis of 2012-2016 Kansas Farm Management Association Cow-Calf Enterprise

Dustin Pendell and Kevin Herbel - K-State Agricultural Economics

As the data reported here clearly show, there is tremendous variability across producers, which means there is room for producers to improve their relative situations. However, before one can improve they need to know where they stand relative to other producers. Thus, benchmarking and identifying an operation’s strengths and weaknesses is the first step to deciding where to focus management efforts. This publication highlights specific areas all can target.


Upcoming Agricultural Economics Events
  • 2018 Risk and Profit Conference
    August 16-17, 2018: Manhattan, KS
    An annual conference hosted by the Department of Agricultural Economics that provides an opportunity for key agricultural decision makers to interact with each other and with faculty on important topics in agriculture. For more information visit: http://www.agmanager.info/risk-and-profit-conference

  • 2018 Ag Lenders Conferences

    October 9, 2018 -  Garden City, KS
    October 10, 2018 -  Manhattan, KS

    K-State’s annual Agricultural Lenders Conferences are designed to provide the Kansas financial community with updates on current agricultural topics.
    More information: http://www.agmanager.info/events/ag-lenders-conferences

  • 2018 Kansas Crop Insurance Workshop

    November 1, 2018 -  Salina, KS
    This one-day workshop will help crop insurance agents, agricultural lenders, farmers/ranchers, and other financial consultants provide better risk management information and advice to their clients or apply to their farm-ranch. If you are involved in the crop insurance industry, either as an agent, a producer, or an ag lender, you should consider attending this workshop.
    More information: http://www.agmanager.info/events/kansas-crop-insurance-workshop

For more information about these and other events, visit http://www.agmanager.info/events/  or contact Rich Llewelyn at rvl@ksu.edu or 785.532.1504. Other events hosted by the Department of Agricultural Economics can be found at http://www.ageconomics.k-state.edu/events/index.html.


Kevin Herbel
Extension Agricultural Economist
KFMA Program Administrator
308 Waters Hall
1603 Old Claflin Place
Kansas State University
Manhattan, KS 66506-4026
kherbel@ksu.edu  |  785-532-8706
www.agmanager.info/KFMA

 

Vision: The Kansas Farm Management Association (KFMA), through its affiliation with K-State Research and Extension, will be the valued and trusted provider of integrated data management systems to apply critical thinking and strategic business planning for farm and ranch decision makers; and will be the premier source of farm-level economic data in the world. 

www.ageconomics.k-state.edu  |  Twitter @kstateagecon  |  Facebook www.facebook.com/kstateagecon

Kansas State University Agricultural Experiment Station and Cooperative Extension Service K-State Research and Extension is an equal opportunity provider and employer. Issued in furtherance of Cooperative Extension Work, Acts of May 8 and June 30, 1914, as amended. Kansas State University, County Extension Councils, Extension Districts, and United States Department of Agricultue Cooperating, John D. Floros, Director. September 2016. Robin Reid & Tom Reust.