The House and Senate Tax Plans, Side-by-Side

Market Intel / December 7, 2017

Credit: Public Domain 

Over the weekend, the Senate passed its version of the Tax Cuts and Jobs Act (H.R.1). This action followed the passage of H.R.1 in the House on Nov. 16. The business elements of the bills have many similarities, though differences in a handful of areas are quite substantial. In an effort to compare the bills and inform our decision-making, we have prepared a matrix that compares the House and Senate bills to one another, as well as the current tax code. For some elements, the only way to determine the impact on farm and ranch businesses is to compare the tax treatment of the same farm under both plans. We have done that below for differences in the individual income tax rates and the taxation of pass-through businesses.

Business Tax Provisions That Are Substantially the Same

Corporate Tax Rate

House Bill

20%  flat rate

Senate Bill

20%  flat rate

Current Law

Rates are 15%, 25%,  34% and 35%

Deduction for Property Taxes

House Bill

Business deduction continues for real estate and personal property taxes on farm business assets.

Senate Bill

Business deduction continues for real estate and personal property taxes on farm business assets.

Current Law

Businesses can deduct real estate and personal property taxes on farm business assets.

Sect 199 Domestic Production  Activities Deduction

House Bill

Repeals Sect. 199

Senate Bill

Repeals Sect. 199

Current Law

Sect. 199 allows a deduction for proceeds from producing agricultural or horticultural products.  The deduction is limited to the lesser of 9 percent of adjusted gross income or 50 percent of W-2 wages paid. Cooperatives can claim the deduction or pass it to their members. 

Capital Gains Taxes

House Bill

Continues approximately the same rates and thresholds as present law.

Senate Bill

Continues approximately the same rates and thresholds as present law.

Current Law

Capital gains taxes are due when farm or ranch land, buildings, breeding livestock and timber are sold. Taxpayers in the 10 and 15 percent income tax brackets pay no capital gains tax. Taxpayers in the 25%, 28%, 33%, or 35% brackets pay 15%. Those in the 39.6% bracket pay 20%.

Sect. 1031 Like-Kind Exchanges

House Bill

  • Continues like-kind exchange deduction for buildings and land (real property).
  • Like-kind exchanges will end for equipment and livestock.

Senate Bill

  • Continues like-kind exchange deduction for buildings and land (real property).
  • Like-kind exchanges will end for equipment and livestock.

Current Law

Capital gains taxes and, in some cases, ordinary income tax on the sale of business property can be deferred if a farmer purchases replacement property of a like-kind. 

Self-employment taxes

House Bill

Does not change laws that determine the SE taxes that farmers pay.

Senate Bill

Does not change laws that determine the SE taxes that farmers pay.

Current Law

Farmers who file their taxes as sole-proprietors or as a member of a partnership pay SE taxes on their net business income. Farmers who organize their businesses as an S-corporation pay SE taxes on the portion of distributions that are classified as salary or wages.

Business Tax Provisions That Are Similar

Individual Income Tax Rates

House Bill

  • $12,000/$24,000 single/joint standard deduction
  • 12% above standard deduction
  • 25% starting at $90,000
  • 35% starting at $260,00
  • 39.6% starting at $1 million

Senate Bill

  • $12,000/$24,000 single/joint standard deduction

  • 10% above standard deduction

  • 12% starting at $19,050

  • 22% starting at $77,400

  • 24% starting at $140,000

  • 32% starting at $320,000

  • 35% starting at $400,000

  • 38.5% starting at $1 million

  • Rates and brackets sunset 12/31/25

Current Law

  • $6,350/$12,700 single/joint std. deduction
  • 10% above standard deduction
  • 15% starting at $18,650
  • 25% starting at $75,900
  • 28% starting at $153,100
  • 33% starting at $233,350
  • 35% starting at $416,700
  • 39.6% starting at $470,700

Sect. 179 Small Business Expensing

House Bill

Temporarily increases the amount of expenditures than can be deducted to $5 million through 2022 and increases the expenditure level at which the deduction begins to phase out to $20 million. Both levels are indexed for inflation.

Senate Bill

Permanently increases the amount of expenditures that can be deducted to $1 million and increases the expenditure level at which the deduction begins to phase out to $2.5 million. Both levels are indexed for inflation.

Current Law

Allows farmers to immediately write-off the cost of new and used machinery and equipment, livestock, single-purpose agricultural and horticultural structures, and bulk storage facilities for commodities and fuel. The current deduction is limited to $500,000 with the deduction beginning to phase out at $2 million.

Immediate Expensing (Bonus Depreciation)

House Bill

Allows businesses to fully and immediately write off business investments through 2022 and expands the deduction to include new equipment.

Senate Bill

Allows businesses to fully and immediately write off business investments through 2022.  After 2022, this percentage reduces by 20% each year until bonus depreciation is eliminated beginning in 2027.

Current Law

Businesses can take 50 percent “bonus depreciation” in 2017, 40 percent in 2018 and 30 percent in 2019. All farm structures qualify for the bonus depreciation. Fruit- and nut-bearing trees, vines and plants can take the deduction when planted rather than waiting until they become productive. 

Deduction for Business Interest Expenses

House Bill

Limits the interest deduction for businesses with more than $25 million of gross receipts by disallowing a deduction in excess of 30 percent of the businesses’ adjusted taxable income. Carry- over rules are available so as to apply the excess interest expense to future years.

Senate Bill

Limits the interest deduction for businesses with more than $15 million of gross receipts by disallowing a deduction in excess of 30 percent of the businesses’ adjusted taxable income. Carryover rules are available so as to apply the excess interest expense to future years.

Provides the option to elect an alternative to the gross receipts test and instead use an alternative depreciation system for property with a recovery period of 10 years or more. 

Current Law

Businesses can claim a deduction for interest expenses. 

Estate Taxes

House Bill

  • Doubles the estate tax exemption to $11 million per individual indexed for inflation.
  • Stepped-up basis is continued, as is the transfer of any unused exemption amount to a surviving spouse.
  • Permanently repeals estate taxes in 2024.

Senate Bill

  • Doubles the estate tax exemption to $11 million per individual and indexes the exemption for inflation through 12/31/25.
  • Stepped-up basis is continued, as is the transfer of any unused exemption amount to a surviving spouse. 

Current Law

  • The current exemption is $5.49 million per individual indexed for inflation.  Stepped-up basis is applied to inherited assets. Any unused exemption can be transferred to a surviving spouse. 

Net Operating Loss

House Bill

  • Net operating losses will not be allowed to be carried back except in the case of farming disaster losses that can be carried back  one year. NOLs can be carried forward indefinitely but will be limited to 90% of income.  

Senate Bill

  • Net operating losses will be allowed to be carried back for two  years.  NOLs can be carried forward indefinitely but will be limited to 80% of income beginning in 2023.  From 2018-2022 the offset is 90% of income.

Current Law

  • Farm net operating losses can be carried back five years. They can be carried forward 20 years.

Business Tax Provisions with Differences

Taxation of Pass-Through Businesses (Sole-proprietors, partnerships and S-corporations.)

House Bill

Thirty percent of income from active business activity (i.e. farming and ranching) will be considered a return on investment and taxed at new business tax rates:

  • Rates of 11% for 2018-19, 10% for 2020-21 and 9% for 2022 forward will apply to the first $75,000 of income, phasing out when income exceeds $150,000.
  • A 12 percent rate applies starting at $75,000.
  • A 25% rate will apply starting at $90,000. This is the top rate.

Self-employment taxes are not owed on the 30 percent of income classified as a return on investment.

The entire amount of income from passive business activity (i.e., a farm in which the owner does not materially participate) is eligible for the business rate with its maximum 25 percent rate. Material participation rules would be used to determine if a taxpayer meets the material participation test. These rules are generally based on the number of hours a person spends each year participating in business activity.

The 25% business rate is generally not available to individuals who own service businesses, for example veterinarians.

Seventy percent of income from active business activity (farming and ranching) will be considered a return on labor and will be taxed at individual rates.

  • 12% after $24,000 standard deduction
  • 25% starting at $90,000
  • 35% starting at $260,00
  • 39.6% starting at $1 million

Farm land rental income and Conservation Reserve Program payments will be characterized as 70 percent being from return on labor and 30 percent being a return on investment.

If a taxpayer believes their return on investment percentage should be higher than 30 percent, a facts and circumstance test is also available to determine the individual taxpayer’s return on investment. This generally uses an IRS-based interest factor multiplied by the capital investment in assets of the farm or ranch.

Senate Bill

Individuals operating pass-through businesses will be able to take a deduction for 23% of their business income through 12/31/2025.

  • Business income includes commodity wages and farmland rental income.
  • The deduction can be carried forward in loss situations.
  • The deduction is limited to 50% of W-2 wages paid to employees.
  • The W-2 limitation does not apply for taxpayers when their income does not exceed $500,000/$250,000 joint/individual and would be completely phased out when income reaches $600,000/$300,000 joint/individual.
  • The deduction is not available to individuals who own service businesses, for example veterinarians, with income over $150,000. The deduction for service businesses starts to phase-out at $50,000 of income.
  • Cooperatives will be allowed to take the 23% deduction when determining their taxable income. 

Current Law

Profits from pass-through businesses are taxed at individual rates.

  • 10% after $6,350/$12,700 standard deduction
  • 15% starting at $18,650
  • 25% starting at $75,900
  • 28% starting at $153,100
  • 33% starting at $233,350
  • 35% starting at $416,700
  • 39.6% starting at $470,700

Alternate Minimum Tax (AMT)

House Bill

Repeals AMT

Senate Bill

  • Retains corporate AMT
  • Retains individual AMT but increases threshold used to determine when AMT is owed.

Current Law

AMT is a supplemental income tax imposed on individuals and businesses that have exemptions or special circumstances allowing for lower payments of standard income tax.

Depreciation of Farm Machinery

House Bill

No provision.

Senate Bill

Shortens the depreciation period for farm equipment and machinery to five years.

Current Law

The depreciation period for farm equipment and machinery is seven years. 

Deduction for Replanting Citrus

House Bill

No provision.

Senate Bill

Temporarily allows citrus growers to expense the cost of replanting groves that have been destroyed by citrus greening though 12/1/27.

Current Law

The cost of replanting orchards must be capitalized and depreciated once the tree is productive.

Taxation of Craft Beverages

House Bill

No Provisions

Senate Bill

Incorporates the Craft Beverage Moderation and Tax Reform Act to streamline regulations for producers of craft beverages through 12/31/19.

Current Law

N/A

Our Calculations

During the recent tax debate a lot of attention has been paid to pass-through businesses, which are businesses in which the individual owners of the business pay taxes on income derived from that business on their personal income tax returns. This is different from C-corporations, where the company itself pays corporate taxes on profits produced by the business. Pass-through taxation applies to sole proprietorships, partnerships and S-corporations. More than 93 percent of farms are considered pass-through businesses and as such the individual income tax rates and pass-through provisions are of significant importance to farming and ranching businesses.

In our calculations, we have also included the important element of off-farm income, since according to the last Census of Agriculture (2012), more than 94 percent of farms had off-farm income. For more than 70 percent of farms less than 25 percent of total household income was derived from farming. In fact, only 21 percent of farm households derived a majority (more than 51 percent) of their household income from farming.

The level of importance of that off-farm income varies considerably by farm size. According to the latest ARMS data (2015), median earned off-farm income was $22,500, $31,789 and $62,500 for commercial, intermediate and residence farms, respectively. Commercial farms are defined as those with annual gross sales of $350,000 or more, intermediate farms are those with less than $350,000 in sales whose principal operators considered farming their primary occupation and residence farms are those with less than $350,000 in sales but whose principal operators’ primary occupation is not farming. As we regularly remind others, farms come in all shapes and sizes, the population of farm households is economically diverse; we examine tax reform with all of those farms in mind.

Our estimates of the impact of the House, Senate and current tax plan are based on a few select elements that are included in all three plans and critical for a basic understanding of the differences between the plans. Our examples are based on taxable income for a married couple filing jointly, calculated based on individual tax rates, standard deduction, two personal exemptions (current only, exemptions are eliminated in both version of H.R. 1) and pass-through business tax rates. The calculations do not include self-employment taxes, which will have an impact on the taxes owed under the House plan since the 30 percent of income from active business activity (i.e. farming and ranching) will be considered a return on investment and not subject to self-employment taxes. Though important, we have omitted this element, since we wanted to focus on the tax liability associated with the pass-through and individual tax rates.

Figures 1 through 5 compare the tax treatment of a married couple with the same household incomes, across different combinations of farm and off-farm incomes. Figure 1 is the result for a farm household with $20,000 in off-farm income. Figure 2 represents a farm household with $30,000 in off-farm income and figure 3 represents a farm with $60,000 in off-farm income. These thresholds are approximately equal to the earned off-farm income of the commercial, intermediate and residence farms surveyed in the 2015 ARMS survey. 

Both the House and Senate plans offer significant reductions in tax liability and the effective rate that farmers pay, based on the elements of H.R. 1 that we evaluated. Of course, there are a number of elements that we did not include, some of which may be very important in determining the amount each individual farm pays. We encourage you to compare all of the differences and refigure your last tax bill to see what it would have been under both plans. And at the end don’t forget to calculate your total effect tax rate, because as we noted a few weeks ago, we’re all about that effective rate

Contact:
Veronica Nigh
Economist
(202) 406-3622
veronican@fb.org
 
Patricia Wolff
Senior Director, Congressional Relations
(202) 406-3670
patw@fb.org
 

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