Tax Reform and Farm Incomes
Farm Groups Praise Senators for New Tax Deduction Added Late to Tax Reform Bill
WASHINGTON (DTN) -- Farm leaders over the weekend praised Sens. John Hoeven, R-N.D., and John Thune, R-S.D., for writing an amendment in the final tax bill to address the elimination of Section 199, which allowed cooperatives to pass a deduction for production and marketing expenses on to their members.
Agricultural tax accountants from K-Coe Isom and CliftonLarsonAllen also offered some quick takes of the final conference tax-reform bill released Friday. Some farmers will benefit from lower tax rates and other provisions such as temporary full deductibility of equipment purchases and an expansion of the estate-tax exemption. There are concerns, however, that these beneficial changes could expire.
Congress will move quickly this week on the tax-reform legislation. The Senate is expected to vote on the conference bill early in the week, and the House should close it out shortly after and deliver the bill to President Donald Trump before Congress leaves for Christmas.
The bill will reduce taxes by $1.65 trillion from 2018-2027, but decrease spending by $194 billion as well. The bill will increase the federal deficit by $1.46 trillion over 10 years, the Congressional Budget Office stated Friday.
The bulk of the tax cuts overall go to individuals with tax savings of $1.329 trillion over 10 years, but the individual tax cuts expire at the end of 2025. Effectively, the presidential election in 2024 will become a mandate on how Congress should treat the expiring tax breaks at the end of 2025 for individuals and families.
The Hoeven-Thune amendment for farmer cooperatives was added to the conference report of the tax bill that the Republicans released late Friday. Hoeven said he and other farm-state senators worked to ensure the final tax bill treated cooperatives fairly.
"Cooperatives provide vital services for our communities and agriculture producers and fill an important role in our economy," he said.
The highly technical amendment allows "a taxpayer other than a corporation" a deduction for any taxable year in an amount equal to the sum of the lesser of the combined qualified business income amount of the taxpayer, or an amount equal to 20% of the excess of the taxable income of the taxpayer for the taxable year, over the sum of any net capital gain, according to a certain definition.
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National Milk Producers Federation President Jim Mulhern noted that the final bill still repeals the Domestic Production Activities Deduction but said, "The legislation allows cooperative members to claim a new 20% deduction on payments from a farmer cooperative."
"Cooperatives would also be able to claim the 20% deduction on gross income less payments to patrons, limited to the greater of 50% of wages or 25% of wages plus 2.5% of the cooperative's investment in property," Mulhern said. "This favorable treatment for gross income will help minimize any potential increase in the tax burden on farmer-owned cooperatives."
Paul Neiffer, a principal with the tax accounting firm CliftonLarsonAllen, explained over the weekend that for farmers filing individually and farmers with income under $315,000 for married couples filing jointly, the 20% reduction is unlimited. Once you go over this income amount, the limitation begins on the deduction to 50% of wages paid by a farm operation or 25% of wages paid plus 2.5% of original cost of depreciable farm assets that are less than 10 years old. As Neiffer notes, "it is a little more complicated than this to calculate." Further, Neiffer states, "This will require us to maintain a new depreciation schedule solely for calculating this deduction."
National Council of Farmer Cooperatives President and CEO Chuck Conner praised Hoeven, saying the senator recognized early on that the elimination of the Section 199 deduction threatened to raise the tax burden of many producers and cooperatives. The new deduction has allowed the NCFC to support the final tax bill.
"The provisions that he and Sen. John Thune were able to secure in the bill will, we believe, keep money in the pockets of family farmers across the country at a time when low commodity prices mean that every penny counts. We strongly support this bill and thank Sen. Hoeven for his leadership," Conner said.
CHS Inc. President and CEO Jay Debertin said the loss of the Section 199 would have had significant impacts beyond agriculture in rural communities. "Sen. Hoeven has prevented that scenario through his efforts to make the new tax code work for co-ops and their members."
Land O'Lakes President and CEO Chris Policinski said the provisions included in the final package "will offset the loss of this deduction, we believe, and help encourage job creation and growth across rural America."
BUSINESS PROVISIONS
The bill would permanently reduce the corporate tax rate from 35% to 21%. Collectively, all of the tax benefits for businesses would lead to $644.1 million in tax savings over the next decade. The asset exemption for the estate tax will increase to $10 million for an individual in 2018, (actually $11 million when indexed for inflation) or $22 million for a couple, but the asset exemption was done as a temporary measure that would revert back to 2017 levels in 2026.
Farmers will have Section 179 bumped up to $1 million and not phasing down until the amount of property placed in service exceeds $2.5 million. Bonus depreciation is also increased to 100% for new assets, other than farm land. As Neiffer noted in his blog, the only negative on bonus depreciation is "that most states do not allow for bonus depreciation or increased Section 179 deductions. You are not allowed to take bonus depreciation or Section 179 on purchases from certain related parties, so care must be used in any family asset transactions going forward." (To read Neiffer's blog, visit https://goo.gl/….)
Current carry-back losses are allowed to go back five years, but would only be allowed to go back two years.
K-Coe Isom noted the tax bill provides near-term benefits for many people in agriculture, but farmers could be affected by the rate changes at the end of 2025. Further, most farmers aren't set up as C Corporations so would not benefit from the 21% rate. Some farms structured as C Corps and that are now in the 15% tax bracket could actually see a tax increase as well.
"The majority of farmers, however, are sole proprietors or structured as pass-through entities," said Doug Claussen, a principal and CPA at K-Coe Isom. "These farmers should see some benefits from the deduction for business and pass-through income, immediate expensing of capital purchases, and to some degree from reductions in individual rates."
The bill changes the treatment of certain farm property as five-year property for depreciation on farm equipment, excluding cotton gins, grain bins, fences or other land improvements. In a look at some of the major provisions, DTN/The Progressive Farmer's Ag Policy blog has also detailed the impacts on individual families.
Read more about it here: https://goo.gl/…
Jerry Hagstrom can be reached at jhagstrom@njdc.com
Follow Jerry Hagstrom on Twitter @hagstromreport
Chris Clayton can be reached at Chris.Clayton@dtn.com
Follow him on Twitter @ChrisClaytonDTN
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