The Michigan Department of Treasury is following suit after the Internal Revenue Service announced its decision to waive the estimated tax penalty for some farmers and anglers who file their 2018 federal income tax return and pay any tax due by April 15.
Normally, the deadline for farmers and fishermen to file and pay their entire tax due is March 1, but because of the federal tax overhaul, the state of Michigan, in conjunction with the IRS, decided to change its due date.
Ron Leix, deputy public information officer for MDT, said the state’s decision to provide the same tax relief was to make it easier for farmers and anglers when they are filing their own state tax return.
Agriculture is the state’s second-largest industry — employing approximately 923,000 individuals representing 22 percent of the state’s employment — and contributes $104.7 billion annually to the state’s economy, according to the Michigan Department of Agriculture and Rural Development.
“I strongly encourage eligible Michigan farmers and fishermen to take advantage of this tax relief,” said state Deputy Treasurer Glenn White, who oversees the treasury’s Tax Administration programs. “Like the IRS, we will waive the estimated tax penalty.”
The IRS said its decision to implement the tax penalty waiver resulted from the possibility of farmers and anglers having difficulties “accurately determining their tax liability by the March 1 deadline that usually applies to them” because of the new tax reform.
Unlike employers who withhold income tax from their employees’ pay, Eric Smith, media relations specialist for the IRS, said there are special rules for qualified farmers, which allows them to decide how they would like to pay their taxes.
He said business owners, like farmers, can choose to pay estimated quarterly taxes or they can choose to file and pay their entire tax due by March 1. The reason for such a distinction is, in part, because farmers tend to receive their income unevenly, usually when farmers yield their crops, according to Smith.
However, now the estimated tax penalty wavier allows farmers and anglers more time to go through the new law so they can accurately file and pay due taxes by April 15.
According to the IRS, the changes in the new law that pertain to farmers include:
New farming equipment and machinery is five-year property. This means that for property placed in service after Dec. 31, 2017, the recovery period is shortened from seven to five years for machinery and equipment.
The shorter recovery period does not apply to grain bins, cotton ginning equipment, fences and other land improvements.
Used equipment remains seven-year property.
The 150 percent declining balance method is not required for property used in a farming business and placed in service after Dec. 31, 2017. Farmers and ranchers must continue to use the 150 percent declining balance method for property that is 15 or 20 years old to which the straight-line method does not apply and for property that the taxpayer elects.
New and certain used equipment acquired and placed in service after Sept. 27, 2017, qualifies for 100 percent first-year bonus depreciation for the tax year in which the property is placed in service.
A taxpayer may elect to expense the cost of any Section 179 property and deduct it in the year the property is placed in service. The new law increased the maximum deduction from $500,000 to $1 million. It also increased the phase-out threshold from $2 million to $2.5 million. For taxable years beginning after 2018, these amounts of $1 million and $2.5 million will be adjusted for inflation.
The new law increases the bonus depreciation percentage from 50 percent to 100 percent for qualified property acquired and placed in service after Sept. 27, 2017. The bonus depreciation percentage for qualified property that a taxpayer acquired and placed in service before Sept. 28, 2017, remains at 50 percent. Special rules apply for longer production period property and certain aircraft.
The definition of property eligible for 100 percent bonus depreciation was expanded to include used qualified property acquired and placed in service after Sept. 27, 2017, if several factors are met.
Farming businesses that elect out of the interest deduction limit must use the alternative depreciation system to depreciate any property with a recovery period of 10 years or more. These are properties such as single-purpose agricultural or horticultural structures, trees or vines bearing fruit or nuts, farm buildings and certain land improvements. This provision applies starting in tax year 2018.
To qualify, farmers and anglers for the 2018 tax year must have received at least two-thirds of their gross income from farming or fishing during 2017 or 2018.
Smith said the gross income from farming must come from cultivating the soil or raising agricultural, which includes income from operating a stock, dairy, poultry, bee, fruit truck farms or a plantation, ranch, nursery, range, orchard, oyster bed, crop shares for the use of your land, gains from sales of draft, breeding, dairy or sporting livestock, among other things.
Gross income from fishing includes income from catching, taking, harvesting, cultivating or farming any kind of fish, shellfish (for example, clams and mussels), crustaceans (lobsters, crabs and shrimp), sponges, seaweeds or other aquatic forms of animal and vegetable life, among other things, according to Smith.
If farmers and anglers, like other taxpayers, file and pay their income taxes late, after April 15, Smith said 5 percent of the individual’s paycheck will be withdrawn by the IRS per month and it tops out at 25 percent.
“So roughly, after five months, you hit the maximum, but the point is after April 15, it starts accumulating very quickly based on whatever is unpaid in taxes,” he said. “So, that is why we tell people to file and pay their taxes on time. If they can’t make the filing deadline, which there are a lot of reasons people cannot, request an extension.”