WASHINGTON, Nov. 2, 2017 - The House Republican tax-reform bill would preserve interest expensing for most farmers and would phase out the estate tax, but some producers would lose a tax deduction that their cooperatives pass on to them.
The bill also significantly expands immediate expensing and depreciation provisions that are in current law. However, tax experts say there are other provisions, including new rules for pass-through entities and self-employment taxes, that could offset some of the benefits.
The bill’s focus is on slashing the corporate tax rate from 35 percent to 20 percent and on shrinking individual tax rates and simplifying the tax code.
The impact of the bill on individual farmers will vary according to their situations.
Most farms are pass-through businesses - sole proprietorships, partnerships and S corporations - that are taxed at individual rates. The top tax rate on some, but not all income, earned by pass-through businesses would be cut to 25 percent. Farmers currently pay an effective tax rate of about 15 percent, according to the Agriculture Department.
“This new tax plan moves us closer to a tax system that rewards the hard work and entrepreneurship of America’s farm and ranch families,” said Zippy Duvall, president of the American Farm Bureau Federation, specifically applauding the expensing and estate tax provisions.
“We will be studying the plan to ensure the new rate structure reduces the tax burden of our nation’s farmers and ranchers and gives them the flexibility they need to reinvest in their businesses,” he said.
Jeff Wald, CEO of K·Coe Isom, an agricultural accounting firm, applauded the bill's authors for including an eventual repeal of the estate tax and preserving the ability of farmers to use cash accounting. “We are worried, however that provisions in the House tax bill could hamper growth for many farms and ranches and could actually increase the amount of taxes these operations pay," he said.
Among the bill's key provisions for agriculture:
Interest expensing: Eliminates interest expensing for corporations but farms and small businesses with less than $25 million in sales would still be allowed to deduct interest.
Estate tax: Doubles the existing estate tax exemption, which is $5.5 million per individual and $11 million per couple for 2017, and repeals the tax after 2023. The bill continues to allow stepped-up basis on inherited assets.
Like-kind exchanges: Section 1031 exchanges, which farmers use to trade land and equipment, would be preserved but limited to real estate. Farms would no longer be allowed to use the provision to exchange equipment or replacement livestock.
Farm co-ops: Members of farmer cooperatives would no longer benefit from the Section 199 deduction that manufacturers currently receive for domestic production. In 2016, co-ops passed on an estimated $2 billion in Section 199 deductions onto their members, according to the National Council of Farmer Cooperatives.
Asset expensing-depreciation: Limits on the Section 179 expensing allowance for farms and other small businesses would be sharply increased. Under current law, businesses may immediately expense up to $500,000 of the cost of new equipment, with a phase-out when businesses spend more than $2 million in a year. Under the bill, the expensing limitation would be increased to $5 million and the phase-out amount would be increased to $20 million.
The existing bonus depreciation provision also would be expanded. Under current law, businesses are allowed to take depreciation on 50 percent of the cost of equipment during 2017, a provision that phases down to 30 percent by 2019.The bill would allow 100 percent depreciation through 2023, when the provision would end.
Paul Neiffer, an agricultural accountant with CliftonLarsonAllen in Yakima, Wash., said the cap on pass-through incomes would benefit few farmers. “Almost all farmers historically have never paid higher than this rate,” he said.
One "major negative" in the bill, he said, is that it would appear to require farms to pay self-employment taxes on much of their income, real estate rents and limited partnership-passive ordinary income. Active business income from pass-through entities and on Schedules C and F would be subject to self-employment taxes up to a maximum of 70 percent of the income. The self-employment tax would fall especially hard on retired landowners who rely on rental income, he said.
The bill would shrink the existing seven tax brackets for individuals into four brackets: 12 percent, 25 percent, 35 percent, and 39.6 percent.
For married taxpayers filing jointly, the 25-percent bracket would kick in at $90,000. The 35- percent bracket threshold would be $260,000. The 39.6-percent bracket threshold would be $1 million.
Farm co-ops have turned their attention to the Senate, including farm-state members of the Senate Finance Committee, to try and preserve the Section 199 deduction, said Chuck Conner, NCFC’s president and CEO.
The committee includes Senate Agriculture Chairman Pat Roberts, R-Kan., as well as Chuck Grassley, R-Iowa, and John Thune, R-S.D.
The NCFC survey found that co-ops passed on deductions totaling $136 million last year in California, $131 million in Minnesota; $80 million in South Dakota, $67 million in Iowa, and $60 million in Nebraska. The deduction for one dairy cooperative last year was worth more than 70 cents per hundred pounds of milk.
“Most of those coops have been passing that deduction onto their farmer members in accordance with how much business they have done with that particular co-op,” Conner said.
(Corrects estimated amount of Section 199 tax deductions.)