The Looming Tax Hit on Ag

OMAHA (DTN) -- Farms nationally could face a potential tax liability increase of nearly $10 billion unless Congress passes extensions on some key tax provisions before the end of 2025.

Individual farmers could see an array of higher taxes and lost deductions or credits, depending on their individual farm and family situations.

As the country heads into a presidential election, several key provisions of former President Donald Trump's 2017 Tax Cuts and Jobs Act are set to expire at the end of 2025.

USDA's Economic Research Service (ERS) has released an analysis of the impact of income and estate tax policies on farm households.

Some key points:

-- The automatic hike in income tax rates would increase tax liability for farm households by nearly $4.5 billion, mainly impacting taxes on off-farm income and for beginning farmers.

-- The loss of bonus depreciation at the end of 2026 could increase tax liability by more than 38%.

-- Estate taxes on farms would more than double as would the taxes on farms that could be hit by the Alternative Minimum Tax (AMT).

Brian Kuehl, director of government and public affairs for Pinion, an agricultural accounting and business advisory firm, said the ERS report is a "great body of work" looking at the aggregate of agriculture. However, it misses some nuances about how farms could be impacted.

"You have mixed livestock and crop operations, for instance. People use the Tax Code differently. What about specialty crops? As we get into tax reform, that's something each group of farmers and each market should be taking a look at is how their members use the Tax Code. Assuming that not everything is going to be renewed, where do you have to put your priorities?" he said.

WHITE HOUSE BUDGET PROPOSALS

The White House FY 2025 budget proposal released Monday is unlikely to be acted on, but it lists several tax proposals, including an increase in the minimum corporate tax from 15% to 21%.

President Joe Biden's budget also again calls for repealing the deferral of gains from Section 1031 like-kind exchanges -- a tool frequently used by farmers who are selling their land.

Biden's plan opposes tax increases for people earning less than $400,000 a year, but his proposal opposes extending tax cuts for the top 2% of Americans earning above $400,000 a year.

QUALIFIED BUSINESS INCOME DEDUCTION

The ERS analysis flagged that "one of the most significant" tax changes scheduled to sunset in 2025 is the deduction of 20% of qualified business income for pass-through businesses. USDA data shows the qualified business income deduction amounts to nearly $2.2 billion in tax benefits for farmers.

Without an extension or permanent fix, the end of that deduction would increase taxes for about 45% of all farm households, ERS stated, with an average increase in tax liability of $2,464. Sunsetting the deduction would have a bigger impact on larger farm households -- adding an estimated tax liability of more than $87,000 for some of the country's largest farms.

The Qualified Business Income Deduction only benefits businesses that have positive income, so the deduction has less impact on farms that often report negative income -- typically farmers with more limited resources.

SECTION 179 AND BONUS DEPRECIATION

The benefits of bonus depreciation have been declining since 2022, though the Section 179 expensing deductions benefit continues to increase with inflation.

Bonus depreciation for the 2023 tax year was 80%, but it fell to 60% for 2024. Bonus depreciation is set to fully phase out by 2026.

Bonus depreciation can be more attractive for farmers than the Section 179 deduction because bonus depreciation can be used on buildings such as machine sheds that have a 20-year depreciation schedule.

USDA's analysis shows the loss of bonus depreciation has the biggest impact on large and very large farms. For the largest farms, the loss of bonus depreciation could raise their tax liabilities by more than 38%.

The House of Representatives overwhelmingly passed a tax bill in January that would return bonus depreciation to 100% for qualified property placed into service after Dec. 31, 2022, meaning it would be retroactive to the beginning of 2023.

The proposal would extend out 100% bonus depreciation for property put into service before Jan. 1, 2026.

Section 179 expensing for small businesses remains a permanent law. For property put into service on Jan. 1, 2024, or after, the option bumps up to $1.2 million and the cap is raised to $3.05 million.

The House tax bill would increase the expense amount up to $1.29 million and raise the cap for qualifying property to $3.22 million. Both amounts would increase based on inflation for taxable years after 2024.

CHILD TAX CREDIT

Multiple tax laws have expanded the Child Tax Credit, but they've also sunset. Looking at 2021, nearly 36% of farm households received $5,604 on average in tax credits for children. Without passage of a new bill, ERS estimates the tax credit for the average farm household would drop by $1,331.

The Child Tax Credit generates nearly $1.9 billion for farm households, making it one of the biggest tax impacts highlighted by ERS. Farmers with off-farm income are those that receive the most benefit.

"We don't typically think of that as an ag provision," Kuehl said. "But it's interesting that they looked at the Child Tax Credit and put some numbers behind that."

The House bill boosted the maximum refundable amount of the tax credit to $1,900 for 2024 and $2,000 for 2025.

AMT

Farmers could face higher taxes if provisions for the Alternative Minimum Tax (AMT) expire as well. The share of farms -- mainly larger operations -- that owe the AMT would increase from .1% to 4.7%. Tax liability for farms hit by the AMT would increase an average of 8.4%. For the largest farms, tax liability could increase an average of 13.2%.

Looking at "large" farms -- those averaging roughly $385,000 in farm income -- the AMT would go from affecting 1.9% of those farms to as high as 37.1%.

For "very large farms -- averaging $1.5 million in farm income or more -- the AMT would go from affecting 14.3% to 30.8% of operations.

ESTATE TAXES

Federal estate taxes paid by farmers would double from an average of $572 million annually to $1.2 billion.

The expiration of the Tax Cuts and Jobs Act takes the current estate-tax asset exemption of $13.61 million per individual ($27.22 per couple) and effectively cuts it in half. Without a law change, the exemption rolls back to $6.89 million per individual,

Less than 2% of the country's farms would remain liable under the estate tax, but the number of "large and very large farm estates" forced to pay the tax would increase.

To guard against a major rollback in estate taxes, Kuehl said producers should consider putting the land into a trust and begin looking at that strategy sooner rather than later. The higher exemption levels create more flexibility that would go away if the exemptions do fall.

"It's not just about how you protect revenue, but you know, who do you want to operate the farm, how do you protect it in the event of liability?" Kuehl said. "How do you make sure your kids maybe can operate it, but if they go through a divorce, you're not necessarily seeing the farm split up? I mean, those are all part and parcel of that estate and succession planning conversation."

The earlier producers begin planning, the better. Kuehl said it takes time to begin estate planning and there are few people focused on agriculture. The process also requires appraisals that take time to carry out. "The universe of lawyers and CPAs specialized in that field is fairly small," Kuehl said. "I would encourage people to start working on it now and not wait until 2025."

POLITICAL CHALLENGES

Each tax consequence could come into play at the end of 2025 as chances are high that Congress will again be split among the parties after the 2024 elections, and a split government depending on the presidential election as well.

"These provisions that are on autopilot, they are going to sunset absent some new action," Kuehl said. "And then you say, 'Well, what kind of actions are we going to see?' Presumably, you're going to see some kind of hybrid if you see a tax package -- some things Democrats like and some things Republicans like. But that also means it probably won't be as aggressive as the 2017 tax cut. You probably won't see all these things sunset. Some will get extended, but the tax environment may not be as favorable as it is today."

Economic Research Service analysis of sunsetting tax provisions: www.ers.usda.gov/webdocs/publications/108636/err-328.pdf?v=4988.3

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

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