The majority of the more than 2 million farms in the U.S. are small businesses. The USDA says that “in 2016, farms organized as pass-through entities constituted over 98% of family farms and 90% of the total value of U.S. agricultural production.” While the Tax Cuts and Jobs Act made many changes for business in general, it carved out some exceptions and special breaks for farmers. The USDA estimates that the overall effect of tax changes made by this law on family farm households (factoring in changes for individuals and businesses) is a reduction in their effective tax rate.
Depreciation recovery periods
Farmers can deduct the cost of certain property using a variety of write-off methods, including the Section 179 deduction, bonus depreciation, and regular depreciation. Regular depreciation is the slowest one; it spreads write-offs over a number of years.
Special rule: The recovery period for certain farming machinery and equipment placed in service in 2018 is 5 years instead of 7 years. Farming businesses are no longer required to use the 150% declining balance method for 3-, 5-, 7-, and 10-year property used in a farming business and placed in service in 2018.
A 100% special depreciation allowance applies for certain property and certain plants bearing fruits and nuts acquired or planted or grafted after September 27, 2017, and placed in service or planted or grafted before January 1, 2023.
Interest expense deductions
Generally, under new law, businesses can only deduct interest expense to the extent of 30% of income (see the instructions to Form 8990, Limitation on Business Interest Expense IRC 163(j). However, small businesses (including small farming businesses) that meet a gross receipts test (average annual gross receipts in the 3 prior years not exceeding $25 million in 2018 or $26 million in 2019) are exempt from this limit and can deduct all of their interest.
Special rule: Farming businesses that do not meet the gross receipts test can elect to deduct all their interest expense. If they do, however, they must depreciate property using the alternative depreciation system (ADS); this results in slower write-offs. Eligible farming businesses include:
- Livestock, dairy, poultry, fish, fruit, nuts, and truck farms.
- Plantations, ranches, ranges, and orchards.
- Fish farms is an area where fish and other marine animals are grown or raised and artificially fed, protected, etc., but not those in an area where fish are merely caught or harvested.
Net operating loss carrybacks
For businesses in general, losses incurred in tax years after 2017 that give rise to a net operating loss (NOL) can only be carried forward to offset income in future years. (The former “excess farm loss rules” do not apply now.)
Special rule: Farmers can carry back NOLs for 2 years and then forward indefinitely. Alternatively, they can opt to forego the carryback and simply carry the NOL forward.
There are numerous other special tax rules for farmers and ranchers. Find a rundown in IRS Publication 225, Farmer’s Tax Guide.