A congressional agreement that would boost the child tax credit and temporarily increase some business tax breaks is paving the way for a monumental battle coming in 2025 over a range of expiring tax cuts that could cost trillions of dollars to extend.
The House Ways and Means Committee approved the short-term tax deal on a 40-3 vote last week, setting up possible floor action as soon as next week. The agreement, which includes a restoration of 100% bonus depreciation, a tax break widely used by farmers in trading equipment, is designed as a bridge to the 2025 expiration of key provisions in the Tax Cuts and Jobs Act, enacted in 2017.
The expiring TCJA provisions include cuts in individual tax rates, a 20% deduction for small business income, and a doubling of the estate tax exemption.
Chuck Conner, president and CEO of the National Council of Farmer Cooperatives, says the emergence of the latest tax deal and the bipartisan vote in Ways and Means is a good sign that Congress will act on the expiring TCJA provisions in 2025.
“It just adds to the pressure next year. They will have to do some kind of tax bill,” Conner said. The challenge for farm groups will be “part of that grand compromise” that will be required to enact a massive new tax bill in 2025, Conner said.
The stakes for the economy and for farmers and ranchers are huge.
According to the Tax Foundation, extending all of the TCJA’s expiring individual and business tax provisions would add $4.1 trillion to the federal deficit. The individual tax provisions alone, which include the 20% 199A business income deduction, and the higher estate tax exemption, would add $3 trillion to the deficit.
The cost of a 2025 tax bill could be even bigger, if Donald Trump wins the presidency, because he has talked about cutting the corporate tax rate from the TCJA’s 21% to 15%. President Joe Biden, by contrast, has proposed raising the corporate rate to 28% while also increasing taxes on wealthy individuals.
Republicans have traditionally argued that the cost of extending existing tax breaks shouldn't have to be offset by spending cuts or revenue increases. The overall cost of the short-term tax bill in the House is offset by early termination of a pandemic-related employee retention credit.
Not extending the TCJA’s individual tax provisions would trigger significant tax increases for farms and other small businesses. Among other things, the TCJA reduced individual tax rates, dropping the top rate from 39.6% to 37%, and created the 20% deduction on business income, known as Section 199A, to line up with a permanent cut in the corporate tax rate. Congress subsequently created another deduction, known as 199G, for cooperatives’ income. The benefit of the 199G deduction is typically passed on to co-ops’ farmer members, Conner said.
He's optimistic the business income deductions will be extended in 2025.
Chuck Conner, NCFC“I think I feel reasonably good about our chances of success here, because I don't really see too many people out there in the Republican Party and … even many Democrats who are saying that as a group of people farmers are paying too little in taxes,” Conner said. That doesn't seem to be a mantra that anyone wants to run a campaign on.”
The TCJA raised the estate tax exemption from $5.6 million to $11.2 million in 2018 and indexed it for inflation. For 2024, the exemption is set at $13.6 million, up from $12.9 million last year. The exemption is doubled for a married couple.
The higher estate exemption, plus the cuts to individual rates and the 199A and 199G deductions all go away after 2025 without congressional extension.
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“Those are serious discussions that Congress is going to have to have and a serious outlay of money, if they're going to extend the provisions” of the TCJA, said Kristine Tidgren, director for the Center for Agricultural Law and Taxation at Iowa State University.
She noted that the child tax credit, which would be expanded by the House tax measure, also is critical to many farm families.
The estate tax exemption alone is a potentially significant issue for farms, especially in areas where there have been significant increases in land values.
A section of Iowa farmland (640 acres) valued at $15,000 an acre would be worth $9.6 million, noted Roger McEowen, an agricultural law specialist at Washburn University in Kansas. If the exemption “comes back down, that becomes a problem for a lot of small businesses, not just farms and ranches.”
For now, the focus is on the House tax bill, and the path forward isn’t certain. The Wall Street Journal editorial board as well as some pro-business groups have raised concerns, echoed by some Senate Republicans, that the expanded child tax credit will encourage people to drop out of the work force.
The House bill, which is based on an agreement between Ways and Means Chairman Jason Smith, R-Mo., and Senate Finance Committee Chairman Ron Wyden, R-Ore., would raise the limit on the child tax credit to $1,800 for 2023, up from $1,600. The credit would go to $1,900 for 2024 and $2,000 for 2025, along with an inflation adjustment for both those years.
The bonus depreciation provision, which allows a business to immediately write off the cost of equipment or buildings, is scheduled to phase out under the TCJA. The provision dropped from 100% to 80% of the purchase price in 2023 and is scheduled to fall to 60% this year, 40% in 2025 and 20% in 2026 before ending in 2027. The House bill would restore the allowance to 100% through 2025, in line with the expiring TCJA provisions.
The House bill also would raise limits on the Section 179 expensing provision, which was made permanent under TCJA.
Section 179 allows businesses to write off up to $1.16 million of the cost of equipment and software for 2023, with the limit phased down dollar for dollar as spending exceeds $2.9 million. The House bill would raise the expensing limit to $1.29 million and increase the phaseout threshold to $3.22 million, with both indexed to inflation.
Wyden told reporters Tuesday the overwhelming Ways and Means Committee vote of the tax bill had caught the attention of senators.
“This is about kids, this is about families, it's about small businesses. A lot of them are just walking an economic tightrope every week trying to pay the bills, and I think, a lot of people were stunned by that margin” in Ways and Means, Wyden said.
Tidgren said farming operations have been relying on bonus depreciation, especially when they bump up against the Section 179 limits, to offset income from equipment sales, since the TCJA ended the use of Section 1031 like-kind exchanges for trading equipment.
“I still don't know if people grasp the impact” the elimination of like-kind exchanges has had on farms, she said. The use of like-kind exchanges now limited to real estate.
McEowen said the temporary restoration of 100% bonus depreciation could have the effect of encouraging farmers to make equipment purchases sooner than they otherwise would have.
If the bill passes, farmers “are going to front-load purchases in ‘24 and ‘25 that they otherwise would spread out for fear that they wouldn't have 100% bonus” after 2025, he said.
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