The House-Senate tax bill approved by both chambers provides near-term benefits to many agricultural producers, but rate reductions and estate tax changes beneficial to the agriculture industry are temporary. There are some expanded and important provision pertinent to the agriculture industry specifically, as well as to small businesses.
National Cattlemen’s Beef Association director of government affairs Danielle Beck said the deal overall is a “good package” for cattle producers and those involved in agriculture, with its continuation of cash accounting, Section 179 business expenses and expanded debt tax exemption rates for the estate tax, which is commonly referred to as the death tax in agricultural circles.
The national agricultural accounting and business advisory firm K·Coe Isom said the bill is a mixed bag for agriculture.
“The core of this bill is a 21% flat rate for C corporations,” said Doug Claussen, principal and certified public accountant with K·Coe Isom. “Most farm businesses are not structured as C corps and won’t benefit from this rate unless they restructure. For farms that are structured as C corps, those in the 15% tax bracket would actually see a tax increase from this flat rate. The majority of farmers, however, are sole proprietors or structured as pass-through entities. These farmers 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.”
“One key concern among agriculture is that the benefits of this bill – lower rates, bonus depreciation for immediate expensing, increased limits for estate taxes – these are all temporary. The individual rates and estate tax changes expire at the end of 2025, while the bonus depreciation begins phasing out in 2022 and fully expires in 2027. The loss and limitations on deductions currently used by farmers, however, are permanent,” Claussen said. “Farmers could see their taxes increase in the future if rate reductions or enhanced expensing provisions are allowed to expire.”
The bill effectively repeals the alternative minimum tax for many farmers. The bill also includes a 20% deduction on business and pass-through income and flattens and reduces individual rates — though by a much smaller amount.
“Starting next year, farmers and ranchers will also be able to take a 20% deduction off their business income. That’s new, and it will reduce the taxes farmers owe,” American Farm Bureau Federation president Zippy Duvall explained.
When the House first introduced its bill, deductible business interest was limited to business income plus 30% of the taxpayer's adjusted taxable income for the tax year that is not less than zero. “This cap would have been detrimental for highly leveraged producers, such as feeders,” Beck noted.
However, Beck explained that the final compromise allows producers to continue deducting interest without any kind of restriction. In exchange, those who utilize this must give up 100% bonus depreciation.
Cash accounting is available for taxpayers with annual average gross receipts that do not exceed $25 million for the three prior taxable year periods. This is up from the current level of $5 million.
Roger McEowen, Kansas Farm Bureau professor of agricultural law and taxation at Washburn University School of Law, said the provision expands the ability of farming C corporations (and farming partnerships with a C corporation partner) to use the cash method to include any farming C corporation (or farming partnership with a C corporation partner) that meets the $25 million gross receipts test.
The provision retains the exceptions from the required use of the accrual method for qualified personal service corporations and taxpayers other than C corporations. “Thus, qualified personal service corporations, partnerships without C corporation partners, S corporations and other pass-through entities are allowed to use the cash method without regard to whether they meet the $25 million gross receipts test, so long as the use of the cash method clearly reflects income. In addition, the provision also exempts certain taxpayers from the requirement to keep inventories,” McEowen added.
Sen. Pat Roberts (R., Kan.) said the bill creates a new system for small business pass-throughs. “The majority of farms and ranches are set up as pass-throughs, and the unique features of agricultural taxation are accommodated including attention to how the new rules will treat farmer cooperatives,” he said.
The bill will allow for immediate expensing of most capital purchases. The Section 179 business expensing and “bonus” depreciation also saw some improvements under the bill. The maximum amount a taxpayer may expense is $1 million, and increases the phase-out threshold amount to $2.5 million for tax years beginning after 2017.
In addition to positive changes for agriculture, the tax bill also repeals or limits a number of provisions important for farmers:
· The bill limits the ability of farmers to carry back losses for only two years rather than the current five years.
· The bill limits the ability of larger farmers to deduct business interest expense.
· The bill repeals the Domestic Production Activities Deduction (DPAD/Sec. 199) used by many farmers and cooperatives (though a fix was offered to offset some of these losses).
· The bill eliminates the use of like-kind exchanges for personal property.
Many are calling it “historic” tax reform, but the bill pushed through the House and Senate really is more of a “relief” package with the potential to add $1.5 trillion to the deficit. Agricultural groups are already saying they’re going to have to ramp up efforts to again fight for continuation of many of their priorities in future years.
“Most of the provisions in this tax bill are temporary, lasting for only seven years, so Farm Bureau will now focus our work on making those important tax deductions, lower rates and the estate tax exemption permanent,” Duvall said.