Rental Income Fixed in Bill

Ways and Means Committee Passes Tax-Reform Bill After Striking Self-Employment Provision

Chris Clayton
By  Chris Clayton , DTN Ag Policy Editor
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House Ag Chairman Mike Conaway of Texas, a CPA, said he has talked with leaders on the tax-writing committee about the issues with adding self-employment taxes to rental income. (Courtesy photo)

OMAHA (DTN) -- In advancing their tax-reform bill to the House floor for debate, the House Ways and Means Committee removed language that would have subjected rental income to self-employment taxes.

The topic had become a major sticking point in the tax-reform package for agriculture because it would have taxed more than 1.8 million farmland landlords, including farmers who lease land back to their family partnerships.

"When H.R. 1 was introduced, we realized that it would expand the types of income subject to self-employment tax, including for rental of land. That would have meant that landowners who were renting cropland for farming would have seen an increase in the self-employment taxes," said Brad Palen, principal and a CPA with K-Coe Isom, an agricultural accounting firm. "After we met with House Agriculture Committee Chairman Mike Conaway and expressed our concerns, we were pleased to see this provision removed by the Ways and Means Committee."

K-Coe Isom stated its staff met with House Agriculture Committee Chairman Mike Conaway, R-Texas, along with staff from the American Farm Bureau Federation and the accounting firm of Clifton Larson Allen. The accounting firms explained their concerns about the impact that the self-employment changes would have had on farmers.

"Chairman Conaway understood our concerns and said he would help make sure that farmers weren't hurt by this self-employment tax provision," Palen said. "He clearly stayed true to his word today and helped avoid what would have been a significant tax increase on many farmers."

The tax-reform bill was voted out of the House Ways and Means Committee on Thursday afternoon on a party-line vote 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 also released details on its tax-reform bill Thursday that has different language in various provisions compared to the House while still sticking with the net $1.5 trillion in cuts over the next decade. Conservative groups, for instance, expressed frustration that the Senate bill would delay any cut in the corporate tax rate for at least one year as a way to reduce the overall cost of the tax bill.

The issue of tacking self-employment taxes to rental income was an "unintended consequence," Conaway told reporters in a conference call on Wednesday. Conaway 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.

Rental income traditionally is considered passive income and not subject to self-employment taxes. Language in the House bill would have added 15.3% self-employment taxes on 70% of rental income.

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.

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Chris Clayton