SIOUX FALLS, S.D. - A few weeks after Congress passed the most sweeping tax reform in decades, farmers are working with their tax professionals to figure out what it ultimately means for their farming operations.
Patricia Wolff, American Farm Bureau senior director of congressional relations, specializes in tax law. She says the Tax Cuts and Jobs Act has many positive aspects for agriculture.
"Farmers and ranchers will benefit from lower tax rates and continue to be able to use some of the tax planning tools that have existed in the past and help them get their taxes down," Wolff says.
The tax reform bill includes the increased expensing for farm equipment and other farm inputs. Wolff says the Section 179 deduction on equipment was raised permanently from $500,000 to $1 million, and farmers will have unlimited bonus depreciation.
"So, farmers should be able to immediately deduct all their business costs, and again those will carry forward," she says. However, that provision phases out, so they will be working to make it permanent.
Tax rates also have been lowered for corporations from 35 percent to 21 percent, but farms not incorporated also get a break.
"The top rate is going from 39 to 37 percent, but there are seven tax brackets and all of them are going down," says Wolff.
On top of that, farm operations can deduct 20 percent of their profits.
"It's a big deal for all farmers and other small businesses to be able to take a deduction worth 20 percent of their profit," she says. "That is huge. And that deduction will carry forward. So, if it can't all be used in one tax year it will carry into the future and can be used to reduce taxes in future years."
South Dakota Senator John Thune says he fought for interest deductibility and other key agricultural provisions in the law that will generate economic growth.
"We created essentially a sort of a small business for farming and ranching exception so that they can continue to deduct their interest, because we know that farming is a capital-intensive business," Thune says. "So, you've got to borrow money for that, and interest deductibility is an important issue. So, we fought to maintain that."
However, he says they are proud of many other aspects of the final bill. "I think they'll benefit from the rate reductions," Thune says. "I think the accelerated cost recovery in terms of the expensing and some of the other provisions...we've expanded cash accounting so more agricultural operations can use it."
Perhaps garnering the most headlines in the new tax reform law was the doubling of the estate tax exemption to $11 million per person and $22 million per couple. There is also a stepped-up basis for inherited property.
"That's high enough that virtually every farmer and rancher in this country will not have to worry about the estate tax," Wolff says. However, she says the exemption is not permanent. "It's an eight-year provision, so we have to start now to make sure that the higher exemption level is permanent."
However, Congress immediately started work to fix Section 199A. Wolff says it was originally included in the act to hold cooperatives harmless.
"They didn't want co-ops to end up paying more money or less money in taxes, but it didn't quite get written correctly," Wolff says.
The language resulted in the unintended consequence of providing a bigger tax deduction for farmers marketing to a cooperatives than to private companies. This includes grain and other commodities.
"Work is underway to change that. So, I don't know how they're going to fix it, but there will be a tweak to that provision so that it's not market distorting," Wolff says.
Agriculture also kept like-kind exchanges for land and buildings, and the Alternative Minimum Tax was repealed. There was also no change in self-employment tax, including land rental income, and business will retain the deduction for real estate and personal property taxes.
The tax reform law went into effect in 2018 and will apply to taxes paid in 2019. Wolff recommends farmers and ranchers work with their tax professionals on tax planning and what the deductions will mean for their operation.