Tax Reform on the Table

Lower Rates Look Great, But Business Deductions at Risk in Tax Overhaul

Chris Clayton
By  Chris Clayton , DTN Ag Policy Editor
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Lawmakers plan to return from the August break with big plans to reform the tax code this fall. (DTN photo illustration by Nick Scalise)

OMAHA (DTN) -- Donna Funk, a principal for K-Coe Isom out of Kansas, had a tough task last week at the American Coalition for Ethanol annual meeting trying to explain the status of tax reform and the impact on ethanol producers.

Funk was challenged somewhat because there's no legislation to actually point to -- just the goals of the Trump administration and ideas that have been proposed by all sides. Without specifics in hand, Funk was still able to highlight that simply changing tax rates doesn't translate into a positive outcome for businesses. Lowering tax rates likely comes with eliminating some beneficial tax breaks.

"Lowering tax rates doesn't automatically mean lower taxes," Funk said.

Lawmakers plan to return from the August break with big plans to reform the tax code this fall. Both sides of the aisle say they are committed to tax reform, but Funk noted just one problem.

"The parties just don't agree with each other, and right now they don't have agreement within their own party about what the right path is," she said.

Tax reform is critical for the GOP, which is increasingly becoming desperate for a major legislative win before 2018, Funk noted. Yet, of all the issues to tackle, tax reform may be right up there with health care in terms of difficulty to complete. Tax reform is a once-in-a-generation piece of legislation.

"We have not seen tax reform like we are talking about today since 1986," Funk said. "This isn't something that happens very often, and when they do it, they do it in a very big way and it can have a lot of varying effects."

At least some Republican lawmakers also are concerned tax reform could fall victim to a worsening relationship with President Donald Trump. The Washington Post reported last week on key GOP lawmakers who visited former President Ronald Reagan's ranch in part to draw some inspiration as they try to rewrite the tax code.

"At the end of the day, President Trump will be incredibly crucial to the success of this," House Ways and Means Committee Chairman Kevin Brady, R-Texas, was quoted saying in the Post article. "Tax reform is the signature issue of this presidency." (To ready the full Washington Post article, visit

Due to a likely lack of support by Democrats in the Senate, Congress may have to use budget reconciliation rules to pass tax reform. A bill would need only a simple majority to pass, but budget reconciliation comes with the caveat that the tax package cannot increase the budget deficit outside the 10-year budget window. This gets into the same kind of short-term extension battles that now encompass dozens of tax credits nearly every year.

One initial question is whether tax reform will have retroactive changes. That may be especially important if Congress is unable to complete a bill in 2017 and the battle carries over to 2018.

"Republicans are still very hopeful they can get something done in 2017," Funk added, "I personally don't think they will get something done in this calendar year."

Funk points to a business deduction such as bonus depreciation that once was approved by Congress in September, but allowed businesses to take advantage of the bonus deduction for purchases back to the beginning of the year. "We've seen it in the past. I think the further we go, the less likely we will have retroactive changes," she said.

There are a lot of up-in-the-air questions, such as how Congress will define the middle class in tax cuts or define "small business." While most farmers may classify as a small business, ethanol plants likely won't meet the definition of "small businesses."

"So if they are focused on helping small businesses, that doesn't necessarily mean they are focused on helping you," Funk said.

Beyond lower corporate rates, lawmakers have to deal with individual, pass-through income for passive and active investors; capital-gains rates; the tax on investment income; Medicare tax; the Alternative Minimum Tax and the estate tax.

"Those last two are both items that could have significant impact on the 10-year budget deficit," Funk said. "My prediction is they won't do away with either one of those. If they do, it will be temporary because I don't think they can come up with enough revenue outside the 10-year period to cover those."

That last statement may shock some farm lobbies that have aggressively championed eliminating of the estate tax even though farm assets make up roughly 2.6% of all assets declared by estates that paid estate taxes in 2015. The bulk of assets in taxed estates are stocks, bonds and cash held by the deceased.

A big issue for businesses is how Congress handles depreciation and immediate expensing. What hasn't been discussed at all is whether immediate expensing is going to be optional or required for businesses. That would essentially get rid of bonus depreciation. So far, there are no guidelines on how much a business could immediately expense, use for bonus depreciation or the kind of businesses -- corporate, partnerships or sole proprietors. Congress has indicated such expensing will not apply to real estate.

"If you are buying land, you are still not going to be able to expense land, but that could change as well," she said.

If businesses are immediately expensing depreciable assets, that leads to the debate about deducting interest on business loans. There is an entire lobby group now -- Businesses United for Interest and Loan Deductibility -- specifically to keep interest deductions in the tax code. Similarly, the real-estate industry has a campaign mounted to defend Section 1031 real-estate exchanges.

"Again, it's more complicated than just how it affects your tax rates because there can be a lot of other ramifications," Funk said. "As we work through these things, if they change that, do we still get this?"

There's debate about discontinuing the concept of net operating losses. The ability to carry forward or carry back a net operating loss could go away. Currently, if farmers or businesses have a loss, they can carry forward the loss or even go back and get a refund on income tax from prior years.

"If that goes away, what does that do to a total cash-flow perspective for somebody over a multiple-year scenario?" Funk said. "If you have a loss this year, you don't get to carry it back or carry it forward. There's no offsetting there, so your cash flow can be impacted."

Other tax credits up in the air include the Domestic Production Activities Deduction (Section 199), a 9% deduction, which affects most manufacturing businesses, including farmers. Another tax credit that could be changed is the Research and Development Tax Credit.

These ties to the various possible changes for businesses led Funk to conclude, "There are a lot of moving parts that I don't think anybody has really stopped to think about. OK, here are all of the things that sound great, but if they put them all together, what does that really look like and what does that mean?"

That is the hard work that still needs to be done, Funk said.

Chris Clayton can be reached at

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Chris Clayton