Recent tax legislation at both the federal and North Carolina levels may affect farmers and rural land owners. The discussion below provides a brief overview of these changes. Regarding some changes, especially those affecting North Carolina taxation, guidance is being issued as the regulations are created. Therefore, some answers may not be available for specific questions at the time of this writing.
Federal Tax Changes
The American Taxpayer Relief Act of 2012 (ATRA) made “permanent” (meaning did not impose a sunset) several tax provisions which had sunsets imposed. These changes affected Income Taxes, Estate and Gift Taxes and the Alternative Minimum Tax (AMT).
ATRA made permanent the 10 percent income tax bracket and added a new 39.6 percent income tax bracket for high income taxpayers. For example the new high income tax bracket applies to single filing taxpayers when taxable income reaches $400,000 and for married filing a joint return the threshold is $450,000. The estate and gift tax exclusion amounts which were to sunset at the end of 2012. The new permanent amount is $5 million dollars per individual plus an inflation index which provides that in 2014 the exclusion amounts are $5.34 million. Portability of the estate exclusion amount was made permanent too, meaning, that a married couple can preserve $10.68 million of assets with proper planning and execution of the first-to-die spouse’s estate and subsequently the surviving spouse.
For farm business owners, the allowable Section 179 expense election has returned to the prior law amount of $25,000 with a $200,000 investment limit. This is a significant decrease from the 2013 amount of $500,000 with an investment limit of $2,000,000. Congress may address this issue in future legislation.
The AMT has a permanent patch with an inflation adjustment annually. Reportedly, this removes nearly 30,000,000 persons from being subject to this “parallel” tax system and paying higher income taxes.
A new tax (originates from the Patient Protection and Affordable Care Act known as ObamaCare), effective in 2013 and subsequent years, is levied on taxpayers who have adjusted gross income above $200,000 for singles and $250,000 for married couples. The new tax is the Net Investment Income Tax (NIIT). The NIIT is a surtax of 3.8% on investment returns. Investment return income is: interest, dividends, annuities, royalties, capital gains and rental income to name a few. Retirement income such as pension and IRA distributions is exempt. Sale of timber or land with capital gains may trigger this new surtax.
North Carolina Changes
Many income tax law changes have resulted since the General Assembly passed and the Governor signed the tax legislation into law in July 2013. The tax law changes affect income tax, sales tax and estate tax. Below are highlights of the changes.
Estate Tax: The North Carolina estate tax was repealed effective January 1, 2013. North Carolina Gift tax was repealed effective January 1, 2009.
- The standard deduction amounts were increased, e.g. $7,500 for single individuals and $15,000 for married couples.
- Personal exemption amounts were repealed.
- In 2014 Itemized Deductions are only allowed for charitable contributions and mortgage interest and property tax paid. The mortgage interest and property tax allowable deduction is capped at $20,000.
- The income tax rate is a flat 5.8 percent in 2014, dropping to 5.75% in 2015 and subsequent years.
- North Carolina for 2013 does not conform to the $500,000 Section 179 Expense Election amount allowed on the federal return. The Expense Election is limited to $25,000 with a $125,000 investment limit. An adjustment must be made to add back to North Carolina income the disallowed amount to arrive at North Carolina Taxable Income.
- North Carolina does not conform to federal law and allow the Domestic Production Activities Deduction; if taken federally, it is added back to North Carolina income.
- Farm related income tax credits for North Carolina were repealed as of January 1, 2014. For example: conservation tillage credit, credit for property tax paid on farm equipment, gleaning crops credit, poultry composting facility credit to name a few.
- In most cases if there is any “value added” done to a product (e.g. selling cuts of meat) the seller must collect and remit sales tax. The example below uses the sweet potato:
a) If the sweet potato is sold by the farmer with the dirt still on the potato that is a sale of product in the original state and NO SALES TAX is charged, collected or remitted. This has been in place for years and still is in place.
b) If the sweet potato is purchased by another vendor and is resold by this second vendor, then 2% sales tax as a food item must be collected and remitted.
c) If the sweet potato is made into a pie and then sold at the farmer’s market, the pie is subject to 2% sales tax as a food item and sales tax must be collected and remitted.
d) If the sweet potato pie is cut and a slice is placed on a plate with a fork and sold, the slice of pie is subject to 4.75% state sales tax PLUS local sales tax as a prepared food (think restaurant) item and sales tax must be collected and remitted.
- Farmers, in order to purchase farm inputs sales tax exempt, must have $10,000 of gross farm income from the preceding year in order to qualify for the exemption. This may affect operators of small farms. THIS IS NOT TO BE CONFUSED with the $1,000 of agricultural product produced as an average, over 3 years, for property tax purposes to qualify for Present Use Value program.