The Internal Revenue Service and the Treasury Department released guidance Friday to help farmers deal with a provision of the Tax Cuts and Jobs Act and reduce their taxes by leveraging a tax break for small businesses.
The 2017 tax law included a provision that exempts small business taxpayers from the capitalization rules under Section 263A of the Tax Code. Farmers could elect to have Section 263A not apply to certain plants produced by their farming business. A taxpayer, aside from a tax shelter, can qualify as a small business taxpayer by satisfying a gross receipts test for the tax year. To satisfy that test, a farming business needs to have gross receipts of $25 million or less for tax years starting in 2018, and $26 million or less for tax years starting in 2019.
Unlike the section 263A(d)(3) election, the small business taxpayer exemption doesn’t require the special rules for the use of the Alternative Depreciation System or characterization of certain property as section 1245 property.
The new guidance issued by the IRS and the Treasury, Revenue Procedure 2020-13, contains procedures for farmers who have elected out of the capitalization rules and wish to apply the small business taxpayer exemption in the same tax year. Friday’s guidance spells out the procedures for farmers who want to revoke their election under Section 263A(d)(3), apply the exemption under Section 263(i) in the same taxable year, along with procedures for eligible farmers who would like to make an election in the same taxable year when they no longer qualify as small business taxpayers.
By Michael Cohn