Horse industry faces new tax landscape in 2018
January 18, 2018
Following President Donald Trump's signing of the new tax law on December 22, 2017, federal policy makers began immediately to discuss the likelihood of moving legislation in 2018 to address technical changes and clarifications to the 1,100-page law. While the American Horse Council takes a deeper dive into the tax law to address in more detail those provisions having a direct impact on the horse industry, please see the below highlights that will impact your tax filing for fiscal year 2018:
Corporate Taxes: The new tax law reduces the corporate income tax rate from 35 percent to 21 percent and takes effect January 1. AHC members filing as "C corporations," which are generally identified by the suffix, "Inc.," will see an immediate reduction in their official or statutory tax rate. AHC members filing as "C corporations" would include racetracks, makers of pharmaceuticals and agricultural equipment, and large breeding operations governed by officers and a board of directors, among others. While many policy experts believe that the new tax code will be easier to navigate from a business perspective, corporate taxpayers' effective liability will vary to the extent they are able to utilize the new code's remaining deductions, some of which are outlined below.
Small Business, "Pass-Through" Deduction: The Tax Cut and Jobs Act establishes a 20 percent deduction for the first $315,000 of joint income, or $157,500 for individual filers, from "pass-through" entities such as partnerships, sole proprietorships and S corporations. This new provision could benefit small businesses that generally report incomes at or near the new threshold level. While various types of "pass-throughs" constitute the fastest growing segment of AHC members, they also include the majority of U.S. farms. According to United States Department of Agriculture data, 85 percent of domestic agriculture production comes from "pass through" entities.
Bonus Depreciation of Equipment: The House and Senate conference report includes 100 percent bonus depreciation – an increase from the current 50 percent rate – through December 31, 2022, for property placed in service after September 27, 2017. Beginning in 2023, bonus depreciation is reduced from 100 percent to 80 percent in 2024, then falls by 20 percent increments each year through 2026. Farm equipment used in a business operation, breeding stock and according to preliminary reviews of the final language, racehorses will benefit from the robust deduction.
Losses at Racetracks: The final law preserves the deduction of losses "sustained … on wagering transactions to the extent of the gains" realized "during the taxable year." However, the law clarifies that the "limitation on losses from wagering transactions applies not only to the actual costs of the wages, but to other expenses incurred by the individual in connection with the conduct of that individual's gambling activity." For example, the law subjects the deduction for travel expenses to and from a racetrack to the cap established by the amount of the gains. Like many of the deductions in the bill, the provision sunsets after 2025.
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Alternative Minimum Tax (AMT) – The new law repeals the corporate AMT, ending the need to calculate tax liability twice for a single filing.
Estate Tax: The final law ultimately preserves the estate tax, but doubles the current exemptions of $5.49 million for individuals and $10.98 million for married couples. Raising the statutory threshold will reduce the number of farms and family businesses subject to the tax. It will also spare many family run businesses from jumping over accounting hurdles to avoid the tax altogether.
State and Local Taxes (SALT) – The tax law includes a significantly downsized, itemized deduction for up to $10,000 of state and local property taxes. This provision, which eliminates the unlimited, longstanding deduction for state, sales and local property taxes, may pose challenges for AHC members who file returns in high-tax states next year. High-tax states, such as New Jersey, are already considering revenue measures, including possible tax cuts, to mitigate the impact of the $10,000 cap on this popular deduction.
In addition to new legislation from Congress to clarify technical issues, the Internal Revenue Service will begin a years-long process of promulgating regulations to implement the new law. AHC recommends that members consult their accountants or other tax professionals to begin assessing the new tax landscape for 2018 and beyond. To view a 550-page copy of an explanation of the final conference report of the bill, click here: http://docs.house.gov/billsthisweek/20171218/Joint%20Explanatory%20Statement.pdf.
For more information related to the new tax law and next steps, including technical corrections and implementation, please contact Bryan Brendle, director of policy and legislative affairs, at firstname.lastname@example.org.
–AQHA, American Horse Council