Agriculture operates in a world of uncertainty. From unpredictable commodity and product markets to fluctuating input prices, from uncertain weather to insect or disease outbreaks, running a farm or ranch business is challenging under the best of circumstances. Farmers and ranchers need a tax code that provides certainty and recognizes their unique financial challenges.
Passage of the Tax Cuts and Jobs Act in 2017 benefits most farm and ranch businesses and should allow them to build their operations and stimulate the agricultural economy. Important provisions include reduced tax rates, the new business income deduction, provisions to allow the matching of income and expenses, immediate cost recovery and an increase in the estate tax exemption. USDA Economic Research Service documented the expected benefits of the tax reform in its June publication “Estimated Effects of the Tax Cuts and Jobs Act on Farms and Farm Households.”
Many of the pass-through business provisions of the Tax Cuts and Jobs Act are temporary and should be made permanent. More the 98 percent of farm and ranches operate as pass-through businesses: sole proprietorships, partnerships and Sub S corporations. Failure to extend important pass-through provisions will result in a tax increase for farmers and ranchers and leave them without ways to deal with the cyclical and unpredictable nature of their businesses.
Tax Cuts and Jobs Act
The Tax Cuts and Jobs Act continues many tax provisions important to farmers and ranchers.
- Stepped-up Basis for Inherited Property
- Cash Accounting
- Deduction for Business Interest Expense (limited when gross receipts exceed $25 million)
- Like-Kind Exchange for Land and Buildings (ends for equipment and livestock)
- Business Deduction for Real Estate and Personal Property Taxes
The Tax Cuts and Jobs Act contains many permanent provisions that help farmers and ranchers.
- Sect. 179 Small Business Expensing Increased to $1 million
- Indefinite Carry Forward of Deductions Indexed for Inflation
- Depreciation for Farm Equipment Shortened from 7 to 5 Years.
- New Flat 21 percent Corporate Tax Rate
- Repeal of the Corporate Alternative Minimum Tax (AMT)
Many provisions of the Tax Cuts and Jobs Act that help pass-through business are temporary and should be made permanent as soon as possible. Failure to extend and make them permanent will result in a huge tax increase for pass-through businesses including the 94 percent of farms and ranches that file their taxes a sole-proprietors, partnerships or S corporations. In addition, the uncertainty caused by their temporary nature make the already tough business or running a farm or ranch even harder.
- Reduced Pass-Through Tax Rates and Expanded Brackets: If not extended, higher tax rates will increase taxes on the majority of farm and ranch businesses.
- New 20 percent Business Income Deduction (phase-out starts when taxable income exceeds $315,000/joint): Repealing the business income deduction would expand the tax base of pass-through businesses, erasing much of the benefit of tax reform legislation.
- Unlimited Bonus Depreciation (Expensing): If not continued, farmers and ranchers will be unable to offset income with deductions for their business expenses. This is especially critical because like-kind exchanges for equipment and livestock are repealed.
- Doubled Estate Tax Exemption to $11 million person/$22 million couple: If the exemption is allowed to revert back more farms and ranches will be subject to estate taxes. And, as long as the exemption level is temporary money must be spent on estate tax planning rather than on growing farm and ranch businesses.
- Increased Alternative Minimum Tax Threshold for Individuals: Rollback of the higher AMT threshold will cancel out important deductions and credits put in place by tax reform.