Another tax season is finished, and if there is a lesson to be learned, it’s that things never stay the same. There are some changes in the tax law coming over the next few years that will impact both agricultural producers’ farm business and personal tax returns. Some of these changes are minor, but some of them are pretty significant when compared to the rules we had for 2022 tax returns. It’s best to be proactive when looking at these changes to hopefully avoid any train wrecks come filing season.
Since the Tax Cuts and Jobs Act (TCJA) in 2017, taxpayers have enjoyed the option to use bonus depreciation to accelerate depreciation on property acquired and placed in service during that respective tax year at a rate of 100%. This has allowed taxpayers to fully depreciate their property without respect to some of the limits put in place with Section 179 depreciation. This deduction is scheduled to phase out, with property placed in service during 2023 only eligible for 80%; 2024 at 60%; 2025 at 40%; 2026 at 20%; and 2027 will be at 0%. Section 179 depreciation limits have increased to $1,160,000, so for many taxpayers, that limitation will not create an issue. For the larger producers, more creativity will be needed when looking for deductions in 2023.
Board for labor
For the corporate farm structure, board for labor has been an advantageous deduction. This deduction allows a farm corporation to write off 50% of groceries and various other living expenses as long as the employee lives on the farm premises and that the expense was for the convenience of the employer. The great benefit is that these expenses are not taxable to the employee as some other fringe benefits can be. Without further tax law changes, these expenses will no longer be deductible starting in the 2026 tax year. This doesn’t mean that the business won’t be able to pay for them; they just are not going to be deductible expenses any longer.
Traditional business meals should not be confused with board for labor. These are meals that have a business purpose and do not have to be on the business premises. For the 2022 tax year, businesses were able to deduct the full cost of food and beverages purchased from a restaurant so long as they weren’t lavish or extravagant. Starting Jan. 1, 2023, these meals once again become 50% deductible as they were in 2020 and prior years.
Overtime pay for ag workers in Washington state
As most Washington ag producers are aware, farm employers in the state are no longer exempt from paying overtime. Starting in 2022, overtime was to be paid on any time worked in excess of 55 hours. That number has moved to 48 hours in 2023 and will be at 40 hours for 2024. There are severe penalties for those who choose to ignore the new laws.
Estate tax exemption
With the expiration of the TCJA at the end of 2025, the estate tax lifetime exemption is due to decrease. For 2023, the exemption is $12,920,000 for single filers, and $25,840,000 for married couples filing jointly. The exemption is about cut in half for 2026, moving to $5,490,000 for single filers and $10,980,000 for married couples filing jointly. These amounts are set to be indexed for inflation, and actual figures have not been released yet. For the farmer who owns a lot of real estate, these are going to be amounts to pay attention to as they could have major estate tax implications.
Mileage rates are increased for 2023. As the cost of fuel and maintenance has increased over the past few years, so have the IRS mileage rates. At the end of 2022, the mileage rate was 62.5 cents per mile. For 2023, the rate has increased to 65.5 cents per mile. For those of you who have elected to use a mileage deduction or reimbursement for your vehicles, you will see added benefit this year.
For the pass-through entity and sole proprietor farmers, the Qualified Business Income (QBI) deduction has been a helpful tool to minimize tax since its implementation in 2017 with the TCJA. The deduction equals 20% of the qualified business income, with some exceptions. This is another tax benefit that is due to sunset at the end of 2025 when the tax law expires.
Change can be good so long as we are prepared for it. While the bulk of these changes are scheduled to occur in the next few years, it is never too early to prepare.
Justin Hunt, CPA, is an employee at Leffel, Otis, and Warwick, P.S. He works out of the firm’s Wilbur, Coulee City and Okanogan offices. He takes pride in the fact that the firm works with many family farms and ag-related businesses throughout the Pacific Northwest. For information, visit low.cpa.