Important Tax Law Changes for Northeast Agriculture in the CARES Act

While guidance and legislation continue to come from all sides, the House of Representatives — following the Senate’s lead — passed the Coronavirus Aid, Relief and Economic Security (CARES) Act (H.R. 748) and the legislation has been signed by President Trump. The purpose of this blog post is to highlight the current legislation’s tax implications and their relevance to Northeast agriculture and customers of Farm Credit East.

Individual Provisions

Tax Rebates

First, the big news everyone has been hearing about is the rebate checks that many taxpayers will receive in the coming weeks. Single taxpayers with an Adjusted Gross Income (AGI) up to $75,000; Head of Household (HOH) with an AGI up to $112,500; and Married Filing Jointly (MFJ) with and AGI up to $150,000; will receive $1,200 ($2,400 for MFJ) so long as they are not a dependent of another individual and have a working social security number.¹  There is also a $500 refund per child (as defined for the child tax credit). Taxpayers with AGI over these amounts will receive a reduced credit amount. Single filers with an AGI over $99,000, HOH filers with one child and an AGI greater than $146,500, and MFJ filers with an AGI over $198,000 (and no children) will receive nothing.

This rebate will be based on your 2019 tax return if it is complete. Otherwise, it will be based on the 2018 tax return.

These refund checks are intended to be an advance payment of a tax credit on a taxpayer’s 2020 tax return. Based on the language of the law, it appears this is written in a taxpayer-friendly way where a taxpayer will not owe money if 2020’s income is higher than 2019 and may be eligible for a larger credit if for example, 2020’s income was lower than 2019’s income. There is no apparent claw back of excess payments, but regulations will likely be forthcoming as to how some of these nuances work.

Tax planning tip: Given the flexibility farmers have with expensing depreciable assets through section 179 and bonus depreciation (as well as income deferral), it makes sense to talk to your tax preparer to determine the best way to qualify for the rebate. Work closely with your tax preparer to maximize this refund.

Tax Relief for Retirement Account Access

The typical 10% penalty for early withdrawals has been waived for distributions up to $100,000 from qualified retirement accounts in 2020 for certain distributions related to the coronavirus. Those distributions include those made to a taxpayer:

• Diagnosed with COVID-19
• Has a spouse or dependent diagnosed with COVID-19
• Experiences adverse financial distress as a result of a job loss, quarantine, reduction in hours, closing or reducing hours of a business, unable to work due to lack of childcare, etc.

The income tax on these distributions would be subject to tax over a three-year period. Under these rules, the taxpayer also has the ability to recontribute these funds during this window turning the distribution effectively into a loan via a tax-free rollover. (Guidance will likely be forthcoming as to how taxpayers under this circumstance would go back and amend prior returns due to any tax previously paid on the distributions).

Tax planning tip: For taxpayers taking out distributions who also own a business, it will become critical to work with your tax preparer to see if there are business losses to offset the taxes on those distributions. (See the previous SECURE ACT post on this type of strategy). For example, under the current rules, orchards and vineyards can depreciate 100% of new plantings. If the costs of those orchards or vineyards are significant, and the farmer chooses to expense those plantings immediately, this may create a business loss. That business loss could possibly offset the qualified retirement distributions.

Another tax planning opportunity allows a taxpayer to elect out of the three-year inclusion of income and recognize the income at once. This might make sense for certain taxpayers based on a holistic review of their tax situation. This strategy reflects some taxpayers who sell land over a multi-year period under an installment sale scenario but choose, for tax planning reasons, to recognize the entire gain up front.

The act also has a waiver for Required Minimum Distributions (RMDs) for the 2020 calendar year. This will be helpful as taxpayers will not be required to take these distributions during a time when these accounts are experiencing losses. Taking distributions during such a time can impact how long those retirement funds will last into the future.

Additionally, for taxpayers looking to borrow from their retirement plans, the loan amount has been increased from $50,000 to $100,000 (the limitation on taking out only 50% of the balance has also been removed).²  Those with outstanding loans are also provided relief as there are provisions to delay repayment.

Charitable Contributions

The Tax Cuts and Jobs Act’s (TCJA) reduced the incentive to itemize due to the limits on the state and local tax deduction. However, with passage of the CARES Act, taxpayers will be able to contribute to churches and charitable organizations in 2020 and deduct up to $300 of those contributions as “above-the-line” deductions.

Charitable contribution limits have also been expanded for 2020. Individuals may deduct up to 100% of AGI for qualified contributions (previously 60%). The corporate limit has also been increased to 25% (previously 10%). Importantly, for some farmers, the provision increases the deduction for certain contributions of food inventory to 25% (previously 15%). Qualified contributions do not include section 509(a)(3) supporting organizations or Donor Advised Funds.

Student Loans

The act provides for employers to contribute up to $5,250 annually toward an employee’s student loan without having that employee recognize the contribution as income (after enactment of the law and before January 1, 2021). There are other parts of the act that provide relief for federal student loans, including suspending payments through September 30, 2020. Furthermore, for those participating in certain loan forgiveness programs, this time period will continue to count towards the forgiveness time period.

Business Provisions

Because the TCJA greatly enhanced the ability to write off capital purchases, it also limited the ability of taxpayers to use losses to offset tax liability. The CARES Act relaxed some of these requirements as indicated below.

Net Operating Losses

Net Operating Losses (NOLs) are now allowed to be carried back again (under the TCJA, farming losses still enjoy a two-year carryback but other NOLs were required to be carried forward) as the rules were amended to provide for a five-year carryback for the 2018-2020 tax years. Furthermore, during this time, the 80% limitation on the amount of income that the NOL could offset under the TCJA has been removed.³

Tax planning tip: Some taxpayers in 2018 were negatively impacted by the tightening of the NOL rules. These taxpayers should work closely with their tax preparers to revisit those situations. The utilization of losses could result in significant tax refunds, which is the intended effect of the CARES Act.

Excess Business Losses

The TCJA enacted rules limited a taxpayer’s business losses ($500,00 limit for MFJ) against non-business income (such as dividend income). The CARES Act removes this limitation for losses arising in the 2018-2020 tax years. The excess loss rules will be reinstated again in 2021 and last through 2025.

Tax Planning Tip: Taxpayers need to work closely with their tax preparers to take a multi-year, tax planning approach to maximize both the NOL rules and the relaxation of the excess business loss rules. Since these rules reemerge in 2021, a multi-year analysis on non-business income realization is warranted.

Business Interest Limitation Deduction

Taxpayers with average annual gross receipts of less than $25 million for the three prior tax years are not constrained by the interest deduction limitation put in place by the TCJA. For taxpayers that are above that limit, the CARES Act increased the 30% threshold under section 163(j) to 50%. Previously, the deduction of business interest expense was limited to the sum of business interest income, 30% of adjusted taxable income and floor plan financing interest expense. For partnerships that are limited by the business interest limitation deduction, the nuances of the CARES Act are more complex, and you should seek guidance from your tax preparer.

Tax Planning Tip: For farmers that are impacted by the business interest limitation deduction, the rules allow eligible farming businesses to elect out of the business interest limitation deduction. However, the tradeoff is that those farmers must use a slower depreciation method. A thorough analysis should be completed in those circumstances where electing out is contemplated as it could have negative consequences, particularly for orchards and vineyards.

Qualified Improvement Property Glitch Fixed

For taxpayers that deal with Qualified Improvement Property (QIP) (generally affecting retailers who make improvements in commercial buildings), the drafting error in the TCJA has been removed, now making the property eligible for bonus depreciation.

Modification of Corporate Prior Year Minimum Tax Liability Credit

The CARES Act accelerates the corporate AMT credits that were previously recoverable (under TCJA) over a multi-year period.

Employer-Related Provisions

Deferment of Social Security Taxes

Employers (as well as self-employed individuals) can defer the 6.2% employer share of Social Security taxes for their employees. Under this provision, these deferred taxes must be paid over the following two years (half by 12/31/2021 and the remaining half by 12/31/2022). This provision will not apply to taxpayers who have loans forgiven under the Small Business Act or section 1109 of the CARES Act.

Tax planning tip: Many farmers, particularly dairy farmers with large 199A cooperative deductions, generally owe little federal income tax but significant Social Security taxes (since section 199A does not reduce self-employment income). Delaying the payment of self-employment tax under this provision could be a good strategy to improve cash flow.

Employee Retention Credit

There is a refundable credit worth 50% of wages paid by employers (for the first $10,000 of compensation, including health benefits per employee) who have had operations interrupted (fully or partially suspended) due to COVID-19, or had a decline by more than 50% in gross receipts (comparing the quarter to the same quarter in the prior year).⁴ There is a difference for employers based on whether the employer has more than 100 full-time employees. For those under 100 employees, all wages will qualify regardless of the current status of the business. For those over 100 employees, only wages paid to employees when not providing the services above will qualify (i.e. to those employees who had reduced hours). The wages must be paid or incurred from March 13, 2020 through December 31, 2020.⁵

The CARES Act prohibits “double-dipping” by not permitting this credit to those who are receiving Small Business Interruption loans or the Work Opportunity Tax Credit. Additionally, wages utilized in this provision cannot be utilized for the employer credits under section 45S (credit for paid family and medical leave).

Excise Tax

For 2020, the excise tax is waived on distilled spirits used for or contained in hand sanitizers that are produced in accordance with FDA rules.

Conclusion

The situation remains very fluid with additional guidance coming out each day. As additional guidance is issued, we will continue to update our postings. In times like this, it is critical that taxpayers maintain an open line of communication with their tax preparers to successfully navigate the changing rules.