Conaway Expects Rental Fix

OMAHA (DTN) -- The issue of tacking self-employment taxes to rental income was an "unintended consequence" of the House tax reform bill that should be fixed before the bill hits the House floor for full debate.

Rep. Mike Conaway, R-Texas, told reporters in a conference call on Wednesday that he had talked with Ways and Means Committee Chairman Kevin Brady, R-Texas, as well as two other members of the Ways and Means Committee about the issue of self-employment taxes on rental income.

"The initial reaction from the folks on the committee was that was an unintended consequence," Conaway said. He added, "I think we will get that fixed."

The tax-reform bill was voted out of the House Ways and Means Committee on Thursday afternoon as House Republicans seek to get the legislation to the full House potentially as early as next week. The bill seeks to cut a net $1.5 trillion over 10 years with an overhaul of corporate tax rates and simplification of personal taxes.

The White House issued a statement praising the bill's advance as "an important step toward providing historic tax relief for the American people. The President's priorities have remained the same throughout this process: delivering tax cuts for middle income families, a simplified tax code, and lower rates for American businesses so they can grow, create jobs, raise wages for their workers, and dominate their global competition."

The Senate Finance Committee is expected to release its tax-reform bill as early as Thursday that is expected to have different language in various provisions compared to the House while still sticking with the net $1.5 trillion in cuts over the next decade.

Currently, language in the House bill would add 15.3% self-employment taxes on 70% of rental income. Rental income traditionally is considered passive income and not subject to self-employment taxes.

Jeff Bushey, a certified public accountant from Pigeon, Mich., said farm accountants have been watching the tax-reform effort and there are concerns about how changes in self-employment taxes would impact both landlords and farm renters.

"It's a challenge and one of the things we are watching in the bill," Bushey said.

Conaway, also a certified public account, told reporters he expected some clarification on the taxes for pass-through entities and the way some farm operations are structured. Ways and Means leaders did not intend to add the language as a revenue raiser or offset for other tax reductions, he said.

A related issue ties to the change on defining actively engaged for tax purposes compared to passive income. Conaway said people who materially participate in an operation will have to have some salary income or income stream that is treated as salary, Conaway said. The tax-reform bill caps taxes on pass-through entities -- passive income -- to 25% but also creates a 70% to 30% split for people that can treat as much as 70% of pass-through income as salary subject to self-employment taxes.

Conaway said for agriculture and landlords to watch the Ways and Means Committee chairman's mark that goes to the House Rules Committee. Conaway said he anticipates the fix on self-employment taxes for rental income would be in that chairman's mark as early as next week.

Bushey also said his firm and others who work on agricultural taxes are also watching to see if Congress will keep the Section 199 Domestic Production Activities Deduction. The deduction, which costs about $8 billion a year, was removed from the House bill. Agricultural co-operatives, however, are major users of the DPAD and have valued the deduction as a $2 billion benefit for farmers.

"That tends to be a big number for our clients so losing that deduction would lead to a significant change in the amount of taxes our clients will be paying," Bushey said.

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

Follow him on Twitter @ChrisClaytonDTN

(CZ/SK)

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