Ag Policy Blog

Delving into Some Complicated Pieces of Tax Reform for Farmers

Chris Clayton
By  Chris Clayton , DTN Ag Policy Editor
Connect with Chris:
Paul Neiffer, a principal at CliftonLarsonAllen

The House passed its tax-reform bill Thursday and the Senate Finance Committee advanced its version of the bill. Both votes were contentious and there are a lot of moving parts to the bills.

I was on the road this week, but I was getting a lot of questions about the bill. So I called up Paul Neiffer, a principal at CliftonLarsonAllen and asked him to offer some explanation on a few issues in the tax bill.

As a farmer running a business, would eliminating the state and local taxes (SALT) deduction impact you or can you keep taking those deductions?

"A farmer operating as a C Corporation would be allowed to deduct state income taxes. Most of our farmers farm as a sole proprietor or as a partnership or an S Corp. That income flows in under their personal return and in that situation, they would not be allowed to deduct their state and local taxes.

"Income taxes paid to the state won't be deductible on the 1040.

"There are a lot of people out there saying the loss of the state and local taxes deduction is really going to affect the middle class. For a lot of our farmers, the increase in the standard deduction (to $24,400 for a married couple filing jointly), eliminating the state and local taxes is a moot point. The standard deduction is going to cover that deduction anyway."

What about property taxes because that seems to be a big concern among some farmers?

"The deduction of property taxes is not going to go away if it is through the Schedule F. It's 100% deductible on Schedule F. For the landlord out there renting the ground out, the property taxes will still be deductible on the Schedule E, which is the cash rental income, or the (Form) 4835, which is the crop share, that's still 100% deductible.

"Property taxes on a personal home, however, may end up not being deductible in the final legislation.

"For the rank-and-file farmer who has a couple of kids, certainly raising the Child Tax Credit up to $2,000 (in the Senate bill) is actually a pretty good deal."

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Anything concern you about the impact of tax changes on your clients?

"I have not seen the bill language on the Senate bill. The concern is there are a lot of these special deductions, such as that 17.4% deduction, is scheduled to expire in 2025. The deep reduction in rates is scheduled to expire."

The 17.4% deduction is a specific deduction in the bill for pass-through business income. The deduction will be phased out for couples making more than $150,000 taxable income or $75,000 for individuals.

The Section 179 bonus depreciation, which would allow up to $5 million in capital equipment write offs, is often limited at the state level. Can that come back to bite people?

"What's happening there on the federal side is you are allowed deduct your farm equipment, but on the state side, some of the larger farm states don't allow that ... So a lot of these farmers are going to be facing a much higher state income tax bill. Now that would be true if we had tax reform or not."

What is the difference between Section 179 deduction and a similar immediate expensing provision in the House bill?

"The difference is with immediate expensing the farmer can elect out. He might say from a self-employment standpoint he might want to take this depreciation over the next seven years instead of taking it all upfront. So he or she can elect out of bonus deprecation, which means it is regular depreciation, but you can still use Section 179 to get your income down to where you want it to be."

Changes in net operating losses will affect farmers, right?

"Unlike current law where you can carry it forward and offset 100% of your income, both the House and the Senate only allow you to carry forward and offset 90% of taxable income and the Senate, after 2025, only allows you to offset 80%.

"It certainly has helped farmers they can carry back five years. Under the new bills, they can go back one. I don't think after the next couple of years that would be a big deal.

"The House bill is certainly complicated enough on the top tax rates. I think the Senate bill is easier and much fairer to the farmers. Under the Senate bill, farmers would get a tax reduction no matter what their tax rate is. As with the House bill, there is bulge in the middle where their taxes could go up 10%."

The House had language that would have taxed landlords with self-employment taxes, but that was removed. That rallied agricultural groups to get that out of the House bill.

"The Senate Finance Committee still might slide something like that in the final bill. I hope they don't."

The House bill doubles the estate tax doubles the estate-tax exemption to $11 million for individuals, up from $5.49 million. The estate tax is phased out entirely after 2023 in the House version of the bill, but not the Senate version.

"The doubling of the estate-tax exemption, I like that. It would be great if the estate tax went away completely, but doubling it, probably for 95% to 99% of our farm families, that probably eliminates them paying the federal estate tax."

What about the loss of the Section 199 Domestic Production Activities Deduction?

"The Senate, what they have done is replaced it with that $17.4% deduction."

Getting rid of the interest deduction a big deal?

"What the Senate has done is carved out a provision where if you want to deduct interest, you can but you have to stretch out the depreciation life on your assets. You could still take Section 179, though.

"On another thing, the fruit guys, the vineyard guys, when they do a new planting they have to wait for five years to start depreciating those. Right now, but the Senate and the House say if your income is under $15 million, or under $25 million, you can deduct that immediately. So that would help out those guys on their cash flows."

So for the Average Joe, their individual taxes may be simpler, but that doesn't seem to be the case with businesses.

"This is not a simplified act. Not even close."

Neiffer's Agribusiness blog can be found at http://blogs.claconnect.com/…

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

Follow him on Twitter @ChrisClaytonDTN

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