Farmers Should Focus on Effective Tax Rate

Podcast / Newsline November 9, 2017

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As lawmakers debate changes to the federal tax code, the American Farm Bureau Federation says that it is important for farmers to focus on the effective tax rate. Micheal Clements has more.

Clements: As Congress considers changes to the federal tax code, AFBF economist Veronica Nigh says that farmers and ranchers need to consider how proposed revisions will impact the overall effective tax rate for their agricultural businesses.

Nigh: What we really care about aren’t necessarily the bracketed rates, but rather how those rates interact with other provisions within the tax code. So, we start layering one provision with another and at the end of all that layering, you end up with an effective tax rate. Basically, what is the percentage of your income that you have to cut a check for to the federal government?  

Clements: Farm Bureau’s focus remains on reducing the overall tax burden for farmers and ranchers. Nigh says there are three main factors that impact effective tax rates for farm and ranch businesses.

Nigh: The first is that most farms file through the individual code, not the corporate code. The second is that the vast majority of the average farms assets are tied up in illiquid long-term assists like land and buildings. And the third is that farm income is predictably unpredictable.

Clements: Because of where the majority of farm assets are, in buildings, land and equipment, Nigh also says farmers need tax provisions that maximize cashflow.

Nigh: Provisions of tax code like cash accounting, like-kind exchange and lower capital gains taxes, along with a handful of others, really help farmers to maximize their cashflow, to average their income across years, so that we are not seeing huge changes in the taxes that farmers pay. And that’s what we’re going to keep an eye on when we start going through the details of the tax plan that the House Ways and Means released.

Clements: Micheal Clements, Washington.

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