Under pressure from farmers, a House panel advanced a sweeping tax reform bill after Republicans made last-minute changes to avert a significant increase in self-employment taxes for many producers.
The bill, which will be on the House floor next week, also was altered to potentially reduce the effective income tax rates paid by farmers and small businesses.
After the House Ways and Means Committee approved the bill Thursday afternoon, GOP member Kristi Noem of South Dakota said “farmers and ranchers should feel very good about the bill,” citing its interest deductability and expensing provisions and benefits for farms and other pass-through businesses.
Thursday night, the Senate Finance Committee released its version of the tax bill, and it includes many elements similar to the House legislation. One key difference: The Senate bill would double the estate-tax exemption, now about $5.5 million, but would not repeal the tax. The House bill doubles the exemption and repeals the tax in 2023.
Both bills would preserve the deductibility of interest expenses for farms and small businesses and continue to allow farms to use cash accounting. Under the Senate bill, the deduction for net interest expense would be limited to 30 percent of business income. The bills also would expand the Section 179 expensing allowance and limit Section 1031 like-kind exchanges to real estate, no longer allowing the exchanges for equipment.
A new provision in the Senate bill would allow a taxpayer to deduct 17.4 percent of business income that comes from a partnership, S corporation, or sole proprietorship. The House bill instead sets a top rate of 25 percent on pass-through businesses for the 30 percent of income that could be classified as return on capital. Seventy percent of pass-through income would be considered wages, under the House bill.
Both bills would end the Section 199 manufacturing deduction that farmer cooperatives often pass on to members. The National Council of Farmer Cooperatives estimates the deductions total about $2 billion a year.
Agriculture Secretary Sonny Perdue praised the House bill in a tweet: "The agenda of tax cuts and reforms championed by @POTUS will boost the entire economy and create jobs, including in the agricultural sector. Action by the House Ways & Means Committee is an important step in the right direction."
The American Farm Bureau Federation wrote the House committee on Tuesday applauding many provisions but raising concerns that the bill would increase self-employment taxes on many farmers. The original contained a provision that would make the rental income paid to pass-through businesses subject to the 15.3 percent payroll tax.
Experts say the provision would have affected many farmers who structured their operations to reduce self-employment taxes and to maximize commodity program payments.
Agricultural accountant Paul Neiffer of CliftonLarsonAllen said that eliminating the self-employment tax concern “is very good news for farmers.”
“That seemed to be the No. 1 concern from agriculture on that self-employment tax,” said another Ways and Means member, Rep. Adrian Smith, R-Neb.
House Agriculture Chairman Mike Conaway, R-Texas, pressured Ways and Means Republicans to address the self-employment tax after meeting with a group of agricultural accountants and a Farm Bureau representative on Monday. Conaway "understood our concerns and said he would help make sure that farmers weren’t hurt by this self-employment tax provision,” said rad Palen, a principal with the accounting firm K·Coe Isom.
The Ways and Means Committee approved a package of changes to the bill Thursday that removed the self-employment tax concern while also reducing from 12 percent to 9 percent the lowest tax rate on pass-through income. The bill also sets the 25-percent top rate on pass-through income, but critics claimed that many small businesses, including farms, would have been unlikely to benefit from the maximum rate.
The 9 percent tax rate would apply to the first $75,000 in come and be fully phased-out at $225,000. The lower rate should reduce farmers’ effective tax rate, said Roger McEowen, an agricultural tax expert at Washburn University in Topeka, Kan. He said it isn't clear whether rental income would qualify for the lower rate. Farms currently pay an effective tax rate of about 15 percent, according to the Agriculture Department.
“America’s farmers and ranchers are ready for a tax system that recognizes their hard work and the unique challenges they face while reducing the tax burden that threatens their livelihoods,” said AFBF President Zippy Duvall. “Thanks to the leadership of the House Ways and Means Committee, we are closer to that goal.”
AFBF had held off endorsing the bill initially, as did the National Federation of Independent Business, which also applauded the changes that the committee made Thursday.
Ways and Means Republicans fended off a series of Democratic amendments intended to highlight ways that Democrats say the bill benefitted the wealthy over the poor and middle-class. On Thursday, the committee defeated a proposal by Rep. Judy Chu, D-Calif., to preserve the estate tax.
“This is not a death tax. It’s a silver-spoon tax for the wealthiest children of this county,” said Chu.
Noem, one of Congress’ most vocal champions for repealing the estate tax, who often cites her personal story from when her father died in the 1990s, argued that repealing it would not only prevent farmers from having to pay thousands of dollars in estate-planning costs and also protect some operations from having to be broken up to pay the tax.
After the committee approved the bill on a party-line, 24-16 vote, Noem told Agri-Pulse that the Senate bill’s doubling of the exemption was “an improvement over the status quo” though she still favors repealing the tax. The current exemption, which is indexed for inflation, is $5.5 million for an individual or $11 million for a couple.
(Updated 9 p.m. with details of Senate bill.)