The Tax Cuts and Jobs Act of 2017 (TCJA) has had an impact on nearly every U.S. person and industry, and the equine industry is no exception. Despite its overall shortcomings, the new law contains a number of provisions that can be utilized to your benefit and we have been working with numerous equine businesses to take best advantage of them. In this post, we introduce some provisions of the new tax law that have a direct impact on horse-related businesses.
Reduced corporate income tax rate
Horse-related businesses operating as “C” corporations now benefit from a reduced corporate income tax rate of 21%. LCCs that elected to be taxed as corporations also receive this rate. The TCJA has eliminated the corporate Alternative Minimum Tax.
20% deduction for pass-through entities
Pass-through entities, including sole proprietorships, partnerships, “S” corporations, and LCCs are now entitled to a 20% deduction on qualified business income, subject to phase-outs for taxpayers in “specified service trades or businesses” who earn over $157,500 (single) or $315,000 (married filing jointly). This includes members of any profession where the principal asset of their trade or business is their reputation or skill (except engineers and architects).
The new deduction is likely to encourage many people who work in the horse industry (including but not limited to veterinarians, trainers, laborers and farriers) to begin working independently if they are not doing so already.
Note that the new tax law also reduces the top income tax rate on owners of pass-through businesses from 39.6% to 37%.
Under 26 U.S. Code § 179 , businesses may deduct the full purchase price of “qualifying business equipment” (equipment used in the active conduct of trade or business) that was purchased or leased during the previous tax year. This is usually preferable to capitalizing and depreciating it. This code section was enacted to provide an incentive for businesses to grow and expand.
There are three limitations to the § 179 election:
For property placed in service as of January 1, 2018, the maximum deduction that you may elect to take in any single tax year is $1,000,000. 26 U.S. Code § 179(b)(1)
The deduction is limited to $2.5 million per year, at which point it phases out.
Your Section 179 deduction may not exceed your aggregate income from the active conduct of your trade or business for that year – any excess may be carried over. 26 U.S. Code § 179(b)(3)
Section 179 property now also includes to “qualified improvement property” placed in service – this includes building improvements, including roofs, HVAC, alarm systems, security systems, and fire protection systems, and excludes building enlargements, elevators, escalators, and improvements to a building’s internal structural framework.
Section 179 also allows a deduction of up to $25,000 of the cost of heavy-duty motor vehicles.
Revised 26 U.S. Code § 168(k) increases the bonus depreciation percentage from 50% to 100%. This means that horse-related businesses now get first year, full expensing on their equipment, farm machinery, race horses, yearlings, and breeding stock placed in service after September 27, 2017. Both new and used equipment (and horses) not yet placed in service now qualify under the new tax law.
Note that you must take the Section 179 deduction first, and may only apply the bonus depreciation allowance to any remaining basis amount.
The 100% bonus depreciation rate applies through December 31, 2022, after which it will decrease by 20% per year until it phases out to 0% by 2027.
Accelerated depreciation of the remaining balance
After full expensing under Section 179 and then 168(k), you are then permitted to depreciate the remaining balance of your business purchases under the Modified Accelerated Cost Recovery System (MACRS).
Your tangible property will be recovered over its specified “useful” life through annual deductions, using the double declining balance method – now 200% of the straight line depreciation rate (up from 150% before the new tax law was enacted). The useful life of farm machinery and equipment is now five years (it previously was seven years).
Individual tax provisions that may benefit you
On a personal level, you may also benefit from the following tax law changes:
Increase in the standard deduction . If your work with horses is best classified as a hobby, the increase in the standard deduction to $12,000 for individuals filers and $24,000 for joint filers may make up – at least in small part – for the loss of your itemize deductions.
Increase in the estate tax exemption . The TCJA doubles the estate tax exemption to $11 million through December 31, 2025, at which time it will revert to last years’ $5.5 million. This should provide tremendous relief for many owners of family businesses and farms.
In our next post, we will list the ordinary and necessary business expenses that horse-related businesses may deduct on their annual tax returns.
* The information contained in this blog should not be used as a substitute for a consultation with equine accountant and/or tax attorney.