Agricultural tax accountants from K-Coe Isom and CliftonLarsonAllen have offered some quick takes of the final conference tax-reform bill released late Friday afternoon.
Some farmers will benefit from lower tax rates and other provisions such as temporary full deductibility of equipment purchases and an expansion of the estate-tax exemption. There are concerns, however, that a lot of these beneficial changes could end.
Congress will move quickly this week as the Senate is expected to vote on the conference bill early in the week and the House should close it out shortly after and deliver the bill to President Donald Trump.
The bill will reduce taxes by $1.65 trillion from 2018-2027, but decrease spending by $194 billion as well. The bill will increase the federal deficit by $1.46 trillion over 10 years, the Congressional Budget Office stated Friday.
The bulk of the tax cuts overall do go to individuals with tax savings of $1.329 trillion over ten years, but the individual tax cuts expire at the end of 2025. Effectively, the presidential election in 2024 will become a mandate on how Congress should treat the expiring tax breaks at the end of 2025 for individuals and families.
The bill would permanently reduce the corporate tax rate from 35% to 21%. Collectively, all of the tax benefits for businesses would lead to $644.1 million in tax savings over the next decade.
Changes in international taxes, meant to draw by the U.S. trillions in off-shore profits, would generate $324.4 billion in additional revenue over the next decade.
If Congress were following the 2010 Pay-Go rules, lawmakers would have to cut $1.48 trillion over the next decade, starting with $135.2 billion next year. UPDATE: It is unclear how Congress will address the pay-as-you-go rules. The article initially stated the tax bill would waive the rules, but that would require 60 votes in the Senate to do so.
The asset exemption for the estate tax will increase to $10 million for an individual in 2018, (actually $11 million when indexed for inflation) or $22 million for a couple, but the asset exemption was done as a temporary measure that would revert back to 2017 levels in 2026.
Farmers will have Section 179 bumped up to $1 million and not phasing down until the amount of property placed in service exceeds $2.5 million. Bonus depreciation is also increases to 100% for new assets, other than farm land. As Paul Neiffer, a principal at CliftonLarsonAllen, noted in his blog, the only negative on bonus depreciation is "that most states do not allow for bonus depreciation or increased Section 179 deductions. You are not allowed to take bonus depreciation or Section 179 on purchases from certain related parties, so care must be used in any family asset transactions going forward." https://goo.gl/…
Carry back losses, now allowed to go back five years, would only be allowed to go back two years.
K-Coe Isom noted the tax bill provides near-term benefits for many people in agriculture but farmers could be affected by the rate changes at the end of 2025. Further, most farmers aren't set up as C Corporations, so would not benefit from the 21% rate. Some farms structured as C Corps and now in the 15% tax bracket could actually see a tax increase as well. "The majority of farmers, however, are sole proprietors or structured as pass-through entities," said Doug Claussen, a principal and CPA at K-Coe Isom. "These farmers 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."
Farmers who receive income from pass through entities will see a 20% reduction. The effective impact of a 37% tax rate and a 20% deduction for pass-through income, would set a top tax rate on business income at 29.6%.
Several Republican senators also ensured the deduction on pass-through entities would also benefit agricultural cooperatives as well. That will help cooperatives offset some of the loss of the Section 199 production deduction that was eliminated in the tax bill. Neiffer noted this provision could allow farmers who sell their crops to a cooperative to have a larger deduction.
The bill changes the treatment of certain farm property as 5-year property for depreciation on farm equipment, excluding cotton gins, grain bins, fences or other land improvements.
Under the bill, the standard deduction is doubled to $12,000 for an individual and $24,000 for a married couple filing jointly. While the standard deduction is doubled, the $4,050 personal exemption is eliminated for each person in the family.
Offsetting the exemption change, the Child Tax Credit is doubled to $2,000 for children up to age 17. The refundable share, thanks to Sen. Marco Rubio, R-Texas, is bumped up to potentially $1,400 per child, depending on tax liability. A $500 tax credit is also added for dependents who are not children.
The deduction on state and local taxes, including property taxes, is capped at $10,000 for individuals. Farmers, however, should be able to deduct as a business expense any property taxes paid on land that is farmed.
Individuals also will find mortgage deductions capped for homes with mortgage debt above $750,000. Home equity loan interest will also no longer be deductible. This could spark a lot of refinancing in 2018.
With the tax bill, Congress also repeals the individual mandate on health insurance.
Drink on It
The bill also includes a reduced excise tax for beer. The first six million barrels (31-gallon barrels) a bear company produces in 2018 and 2019 will be taxed at $16 a barrel rather than $18 a barrel.
Chris Clayton can be reached at Chris.Clayton@dtn.com
Follow him on Twitter @ChrisClaytonDTN
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