golden horses on Minnesota Capitol
UNALIGNED TAX LAWS: Federal and state tax laws pertaining to Section 179 depreciation are no longer in alignment following the veto of Gov. Mark Dayton of the tax bill sent to his desk by Minnesota lawmakers during the 2018 session. Farmers will be affected by this until changes are made to state tax law.

Farmers to pay for nonconforming federal, state laws

Commentary: Fast action in early 2019 by Minnesota lawmakers and a new governor could avert major tax filing headaches.

By state Rep. Paul Anderson

Landmark tax reform was passed in Washington, D.C., last year, and the result will be lower taxes for many on the federal level.

State Rep. Paul Anderson

However, for Minnesota residents, the same cannot be said. That’s because Gov. Mark Dayton vetoed bipartisan legislation that was sent to his desk at the end of the 2018 session.

It may not have been the perfect bill, and maybe it didn’t do exactly as the governor wanted, but it was a good bill that actually lowered state taxes for most of our residents.

Aside from making the process of filing a tax return next year more complicated, not having a conformity bill in place raises many questions.

It may also result in a change of buying habits for those who buy large capital items and then depreciate them. That’s because one of the major provisions of our Minnesota tax bill was fully complying with federal Section 179 depreciation. And because the federal tax bill makes changes in how like-kind exchanges are treated, it will make a difference in how farmers, for example, look at trading in older machinery.

Now, the value of the traded item will be counted as income, but because federal law allows up to $1 million in fast depreciation, that “paper income” of the trade-in value can be depreciated in one year on federal returns.

However, Minnesota allows only $25,000 in fast depreciation, with the remainder of the value written off over the ensuing four years. So, for example, if a combine worth $50,000 is traded in, that value will now be treated as income. And in this example, since we can only write off half that amount in the first year, farmers are concerned about having enough real income to pay the tax on that new “paper income.” In addition, they may not have enough income in those years down the road to take advantage of the depreciation the state spreads out over four years.

For sure, filing tax returns next year will be more challenging. We are told the folks who write tax software need about three months to make major upgrades and changes, which is problematic for farmers who file their tax returns by March 1.

One possible scenario would have the Legislature and governor pushing back filing deadlines for state returns.

In any case, it will take fast action early next year to avert major headaches.

Anderson, who represents District 12B, is chairman of the Minnesota House Agriculture Policy Committee.

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