Congressional Republications finalized a sweeping tax reform package that could cut tax rates for farmers and other small businesses while expanding the Section 179 expensing allowance and doubling the estate tax exemption.
The National Council of Farmer Cooperatives also won a last-minute change meant to offset the loss to co-ops of the Section 199 deduction, which the legislation would repeal.
The final bill, which was posted late Friday afternoon, also would preserve the ability of farms to write off interest expenses and to use the cash accounting method, two top priorities for farm groups.
To reduce taxes on farms and other small businesses, the bill would lower tax rates and create a new 20-percent deduction for pass-through income from partnerships, sole proprietorships and S corporations. Joint filers could take the 20-percent deduction on income up to $315,000.
Most farms “should see some benefits from the deduction for business and pass-through income, immediate expensing of capital purchases, and to some degree from reductions in individual rates,” said Doug Claussen, a principal with the agricultural accounting firm K·Coe Isom.
However, he noted that the individual tax provisions aren’t permanent, and that the final bill would limit the ability of farmers to carry back losses to two years, rather than the current five years.
All of the individual tax provisions, including the doubling of the estate tax exemption and the pass-through benefits, would expire after 2025, a cost-cutting move used to ensure the bill complies with Senate budget rules by not increasing the deficit after 10 years.
Republicans say a future Congress would almost certainly extend the individual benefits. A cut in the top corporate rate from 35 percent to 21 percent would be made permanent.
The reduction in rates for pass-through entities is intended to keep them competitive with corporations, which will see their top rate cut from 35 percent to 21 percent. At higher levels, the deduction would be limited to a portion of the income.
The individual tax rates, which now range from 10 percent to 39.6 percent, were reduced. The new rates are 10, 12, 22, 24, 32, 35 and 37 percent. The standard deduction is nearly doubled to $24,000 for a married couple.
Co-ops lobbied heavily to retain the Section 199 deduction, which is worth about $2 billion a year, 95 percent of which they say is passed on to members. The remaining 5 percent is retained by co-ops.
The Senate bill allowed co-ops to qualify for the deduction but that would have replaced only a fraction of the benefit of Section 199 since the new deduction would have been applied to taxable income, while Section 199 deducted from the value of the co-ops’ domestic production activities. In a key victory for the co-ops, the formula for the Senate provision was altered in the final text to allow the 20-percent deduction to be applied to a co-op’s gross income, not its taxable income.
Jim Mulhern, president and CEO of the National Milk Producers Federation, said "the final compromise to address the loss of the Section 199 deduction will help protect farmer-owned businesses from a major tax increase at a time when America’s farm sector is struggling with low commodity prices and reduced incomes."
Under the final bill's formula, co-ops could claim the deduction on gross income minus payments to co-op members, limited to the greater of 50 percent of wages or 25 percent of wages plus 2.5 percent of the cooperative’s investment in property.
The bill appears headed to relatively easy passage in both the House and Senate next week, sending the bill to President Trump for his signature.
Republicans control just 52 seats in the Senate, leaving them little margin for error. But Bob Corker, a Tennessee Republican who voted against the Senate bill, announced Friday that he would support the final bill, and another holdout, Marco Rubio, R-Fla., endorsed the final measure when a child tax credit was expanded.
Democrats have slammed the bill as a giveaway to the rich, but Republicans insisted that the bill would also benefit the middle class while stimulating the economy.
“Americans are learning how many tax promises Republicans are willing to break, how many cons they’re willing to run, how many hardworking families they’re willing to betray to guarantee handouts to powerful CEOs and campaign donors,” said Sen. Ron Wyden of Oregon, the ranking Democrat on the Senate Finance Committee.
But Senate Agriculture Chairman Pat Roberts, R-Kan., insisted that people in “every income level will experience tax relief.
“I am especially pleased with the provisions for small businesses which will also help farmers and ranchers. All of us want our economy to improve and expand. I hope the Senate will approve these long overdue reforms and send them to the president to be signed into law so that Americans may have an extra special holiday this year."
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Here is a look at the major agriculture issues:
TAX RATES:
Current: Rates are 10, 15, 25, 28, 33, 35 or 39.6 percent.
Final bill, with brackets: 10 percent, (income up to $19,050 for married couple, filing jointly), 12 percent (up to $77,400), 22 percent (up to $165,000), 24 percent (up to $315,000), 32 percent (up to $400,000) and 35 percent (up to $600,000) and 37 percent (over $600,000).
Standard deduction doubled to $24,000 for married couple.
PASS-THROUGHS
Current: Business income from sole proprietorships and S corporations is taxed at individual rates which range from 10 percent to 39.6 percent.
Final bill: New 20 percent deduction that applies to first $315,000 of joint income earned from proprietorships, partnerships and S corporations. At higher levels, income considered business profits would effectively be taxed at a top rate of 29.6 percent.
The income threshold was cut from the $500,000 level that was in the Senate bill to prevent high earners from using the pass-through deduction to cut tax liability, according to a summary of the bill.
CASH ACCOUNTING
The final bill would allow farmers to continue using cash accounting.
COOPERATIVES
Current: Section 199 deduction, worth about $2 billion a year, about 5 percent of which is retained by co-ops, the rest passed on to members.
Final bill: Makes co-ops eligible for the pass-through deduction, as the Senate bill, but the formula was changed to allow the deduction to apply to gross income, rather than taxable income.
COST RECOVERY
Current: Section 179 allows farms to expense up to $500,000 of the cost of equipment, buildings, breeding livestock and dairy cows. The allowance doesn't apply to used equipment and is phased out when the purchases exceed $2 million.
Final: Increases the Section 179 allowance to $1 million, with phaseout at $2.5 million.
ESTATE TAX
Current: Exemption of $5.5 million per individual and $11 million per couple in 2017, indexed for inflation.
Final bill: Doubles the exemption through 2025. Heirs also will continue to benefit from stepped-up basis.
INTEREST DEDUCTIBILITY
Current: Farms can fully expense interest costs.
Final bill: Farms and small businesses with up to $25 million in revenue can continue expensing interest.
LIKE-KIND EXCHANGES
Current: Section 1031 exchanges are allowed for equipment and some livestock, including cattle, as well as real estate.
Final bill: Limits like-kind exchanges to real estate.
STATE AND LOCAL TAXES
Current: Income and property taxes fully deductible. Property taxes can be expensed on Schedule F.
Final bill: Allows a deduction of up to $10,000 a year for a combination of state and local income taxes and property taxes, or sales taxes and property taxes. Property taxes can still be expensed on Schedule F.
Read the bill text and explanatory statement here.
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