Accountant: Change Tax Bill for Farms

OMAHA (DTN) -- The House tax-reform bill is out for scrutiny and there already are several areas in the legislation that industries want changed, including in agriculture.

The House GOP bill, the "Tax Cuts and Jobs Act," lowers the corporate tax rate from 35% to 20% and creates a new 25% tax rate for pass-through entities. In return, the bill eliminates or puts tighter limits on an array of business deductions and tax credits.

The bill will be debated in the House Ways and Means Committee next week. The Senate Finance Committee will release its own bill soon, as well. Republicans on the Senate side praised their House brethren on Thursday, suggesting the Senate bill likely won't be far off the House bill.

K-Coe Isom, an agricultural accounting and consulting firm, applauded aspects of the Republicans' proposed tax overhaul bill Thursday while calling for changes because the bill as written could raise effective tax rates on many farmers and ranchers.

Jeff Wald, CEO of K-Coe Isom, said the phase-out of the estate tax will be welcome news for farms and ranches that could be hit by the tax. The tax bill would double the asset exemption for individuals to $11 million, but phase out the estate tax after 2023.

Wald also applauded Republicans for not limiting farmers' ability to use the cash method of accounting. Cash accounting is maintained for any company that does not have gross revenue averaging $25 million over a three-year average.

The bill increases Section 179 immediate expensing to $5 million before 2023 for businesses with $20 million or less in overall capital expenses.

Still, Wald said there were provisions in the tax bill that would hamper growth for farmers and ranchers and could increase their taxes. These include caps on the interest-expense deduction, scaling back carry-back of losses, the elimination of the Domestic Production Activities Deduction and limits on like-kind exchanges.

The tax plan would cap business-interest deductions at 30% of adjusted taxable income. Like cash accounting, businesses with average revenue of $25 million or less would be exempt from that cap.

Wald called on Congress to consider four changes to the bill:

-- Exempt farm businesses from limits on interest deductions. Farms and ranches often finance equipment, land and input costs with debt financing.

Unlike other sectors of the economy, agriculture rarely turns to equity financing, relying much more heavily on debt financing to operate. While it is good that small businesses are exempt from interest expense limitations in this bill, Wald said it would be better if all farm businesses were exempt from this limitation.

-- Allow farmers and ranchers to use like-kind exchanges for farm equipment. The current tax code allows farmers to avoid paying taxes on the trades of equipment provided that the farmer acquires similar equipment.

-- Congress should preserve the ability of farmers to use such like-kind exchanges. This creates an incentive to replace aging farm equipment with new purchases, which is good for agricultural competitiveness and good for ag manufacturers and equipment dealers.

-- Exempt agriculture from the elimination of the Domestic Production Activities Deduction (Sec. 199). The Domestic Production Activities Deduction (DPAD) is a deduction that applies to proceeds from agricultural products that are manufactured, produced or grown by farmers.

There are special provisions that allow cooperatives to pass the benefit of the deduction directly through to their farmer members. It is estimated by the National Council of Farmer Cooperatives that the deduction returns nearly $2 billion annually to rural areas in all 50 states.

-- Allow agriculture to carry-back losses to offset taxes paid in previous good years.

"Agriculture is a highly volatile industry with significant swings in commodity prices and input costs," Wald noted. "When a farmer experiences a loss during a bad year, they should be able to continue to apply that loss to offset taxes paid in previous good years."

The full tax bill can be viewed at https://waysandmeans.house.gov/…

Chris Clayton can be reached at Chris.Clayton@dtn.com

Follow him on Twitter @ChrisClaytonDTN

(ES/AG)

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