Is the tax package a good deal or a raw deal for farmers and ranchers?
By now, you've probably seen several media headlines about the huge package of tax changes that the GOP-controlled Congress finally passed this week.
Most of the media "buzz" is either highly favorable or extremely critical, and usually, that's a reflection of the political party sources quoted in each piece.
For example, Democrat Sen. Heidi Heitkamp of North Dakota slammed the legislation.
"It's Congress' job to put our country on a strong path forward," Heitkamp said. "Unfortunately, this bill does the opposite. It will put nearly $1.5 trillion on the country's credit card, passing those costs on to our children and grandchildren. And it will increase costs for most North Dakotans in the long-term, while corporations and the wealthy reap permanent benefits."
But her GOP counterpart offered high praise for the tax changes.
"This legislation lowers rates across the board for individuals and families, enabling hard-working Americans to keep more of their paycheck," noted Sen. John Hoeven, R-N.D. "At the same time, it lowers rates and provides relief for small businesses, including our farmers and ranchers. This will enable us to grow our economy and create more jobs with higher wages."
The final impact will probably range somewhere in the middle of what you are currently hearing or reading in the headlines. And, of course it will vary by each person's individual tax situation and farm ownership structure.
Already, experts who deal with farmers' and ranchers' tax returns are starting to analyze the measure and many are giving it fairly high marks. Kristine Tidgren, who leads Iowa State University's Center for Agriculture Law and Taxation has a great overview of what's in the final tax package.
The ag accounting and business advisory firm K·Coe Isom also looked at the potential outcomes of tax reform.
The House-Senate Conference bill cuts the tax rate for C corporations to 21 percent from 35 percent beginning in 2018 and reduces tax rates for the highest individual earners, the firm noted. The final bill, also includes a 20 percent deduction on business and pass-through income and flattens and reduces individual rates — though by a much smaller amount.
Most farms aren't structured as C corporations, and won't benefit from the lower corporate rates. But the majority of farmers, who are sole proprietors or structured as pass-through entities, "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," says Doug Claussen, principal and CPA with K·Coe Isom.
The bill effectively repeals the alternative minimum tax for many farmers and will allow for immediate expensing of most capital purchases, while continuing cash accounting. On estate taxes, the bill doubles the current exemption of $5.5 million per individual and $11 million per couple through 2025. Heirs also will continue to benefit from stepped-up basis.
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.
In addition to positive changes for agriculture, K·Coe Isom pointed out that 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 only two years rather than the current 5 years.
• The bill limits the ability of larger farmers to deduct business interest expense.
• The bill eliminates the use of like-kind exchanges for personal property.
"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. A cut in the top corporate rate from 35 percent to 21 percent would be made permanent.
"The loss and limitations on deductions currently used by farmers, however, are permanent," said Claussen. "Farmers could see their taxes increase in the future if rate reductions or enhanced expensing provisions are allowed to expire."
Republicans say a future Congress would almost certainly extend the individual benefits, but Democrats are none too sure.
As a member of the tax-writing Finance Committee and key supporter of the tax package, Sen. 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," he emphasized.
For more on the new tax law, go to www.Agri-Pulse.com