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Farm Tax Code Changes Create Winners and Losers

Estate tax faces elimination or tweak.

There has been a lot of talk lately about the potential tax bill that may get to the president’s desk, and even more discussion about the possible impacts on farmers.

At the moment, the House has passed a bill, and the Senate vote is pending. If the two houses can keep the expected lost government revenue (i.e., tax reductions) down to $1.5 trillion over 10 years, then they can send a bill to the president through a process known as reconciliation. As you may have heard, reconciliation only requires 50 senate votes to pass.

It is impossible to predict exactly what may come of the reconciliation process, but let’s look at the possibilities and how they relate to farmers. Various organizations believe that reduced tax revenue will cause some automatic budget cuts. Apparently, crop insurance subsidies are exempt from automatic cuts, but it could affect two programs that provide safety net payments to farmers – Agricultural Risk Coverage (ARC) and Price Loss Coverage (PLC). It’s not unusual for those payments to run $10,000 or more per year for a farmer.

Some pundits are predicting reduced funding for the Commodity Credit Corporation, which helps fund farm storage construction, short-term operating loans to farmers, dairy margin protections, loan deficiency payments, and other programs. At this point, potential cuts to any USDA programs are only hypothetical.  Don’t worry about changes until they are signed into law, and realize that any funding that is reduced this year could be increased next year.  

Zippy Duvall, president of American Farm Bureau Federation, said recently, “Today’s passage of the Tax Cuts and Jobs Act (H.R. 1) by the House of Representatives puts us one step closer to a tax code that works for all farmers and ranchers. Lower rates combined with the preservation of small business expensing, like-kind exchanges, and the business deduction for state and local taxes are just a few of the things we are pleased to see in this legislation.”

If you search for opinions on whether or not the House or Senate bills are good or bad overall for farmers, you can find scores of people in either camp. Whenever the tax code is changed, there are winners and losers. The standard deduction is set to double from $12,000 to $24,000, but the deduction for state and local taxes could still be limited or eliminated. The House bill calls for a 20% top rate on C corporations and a 25% top rate for proprietorships, LLCs, S corporations, and partnerships. These tax rates are better for farmers, no matter what kind of entity they are operating.  

On the negative side, the domestic production deduction could be eliminated in the reconciliation process, and farm equipment dealers are anxious to find out about senate plans to put broad limits on business interest deductibility, including dealer floor plan interest. Lobbyists for auto dealers (who use the same kind of floor plan inventory loans) are trying to convince the Senate not to change the current interest deductibility laws.  

Larger farmers could win if the proposed elimination of estate tax is signed into law. The current exemption for estate taxes is $5.6 million. The House bill initially doubles that exemption and then repeals the entire tax by 2024. The senate doubles the exemption but does not repeal the tax. Mary Kay Thatcher, senior director of congressional relations with the American Farm Bureau said, “I guess if I were a betting person, I’d bet it’s more likely that it gets doubled rather than repealed, just from the perspective of the cost.” 

If you make over $200,000 per year net, you may be familiar with the complex Alternative Minimum Tax. It does exactly what it says; it makes you pay more than the regular income tax rate when you make in excess of certain thresholds. Both the House and Senate tax plans eliminate the AMT, which is a great thing from a tax code complexity standpoint.

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