There's no way to put a pretty face on tax reforms under discussion in the Senate Finance Committee this week. The suggestions are not yet included in any legislation, but are early drafts of what could become the first major overhaul of the tax code since the 1980s. While packaged as tax simplification and a fairer corporate tax rate for big business, congressional tax committees would need to offset those shifts with tax increases elsewhere. Small business owners may find themselves footing the bill for such reforms.
Major rule changes on accrual accounting and depreciation in the Senate proposal would be particularly "nasty" for larger-scale livestock operations, say CPA firms that specialize in agriculture. And even garden-variety crop producers and landowners with highly appreciated farmland could face the loss of some of their most beneficial tax advantages.
"Hardly any farm asset would be better off under these proposals, but for livestock guys it's horrible," Paul Neiffer, a Yakima, Wash., CPA with CliftonLarsonAllen tells DTN. For example, specialty livestock buildings like dairy parlors or confinement hog and poultry operations would be depreciated over 43 years in the Senate plan, versus 10 years under current law. What's more, any property put in service prior to enactment would be subject to the slower depreciation schedules on leftover depreciation, so some features threaten to be retroactive.
"Farmers who bought $1 million worth of combines can fully depreciate them over eight years now, but it could take 35 years to fully depreciate them under this proposal," Neiffer says. There's also a proposal to eliminate the fertilizer deduction, but other proposals on inventory might offset that loss, he says.
Property owners would also lose like-kind exchanges, a blow to those who defer capital gains on highly appreciated farmland by investing in similar property elsewhere. Some within the farm community have blamed like-kind exchanges for fueling farmland gains around booming suburbs in the mid-2000s. On the other hand, there's no question that tax savings using this technique can be substantial.
Neiffer recognizes some proposed features could be positive for agriculture. For example, Sec. 179 depreciation would be set at $1 million and phase out beginning at $2 million. Currently, businesses can write off $500,000 of Sec. 179 property in 2013, but the limit would revert to $25,000 unless Congress enacts a change.
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"For most farmers, the benefit of having $1 million in Sec. 179 should outweigh the costs of stretching out the lives of land improvements and farm buildings. However, for livestock intensive operations such as hog, dairy and poultry farmers, this may be a major negative," Neiffer says.
"All in all, I believe there's more negative than positive changes in the proposed Senate package," he adds.
One significant move is a proposed rule change that would limit cash accounting only to those businesses with less than $10 million in gross receipts. By forcing larger operations to use accrual accounting and pay taxes up front, ag businesses would limit their ability to weather price and income variability, cautions Brian Kuehl, director of federal affairs for Kansas-based Kennedy and Coe LLC. "Under this proposal, farmers could be required to pay taxes on products for which they have not yet received payment."
Kennedy and Coe estimates this proposal could affect feed yards responsible for 73% of U.S. beef production and dairies producing about 30% of the U.S. milk supply. "That's really reflective of just how capital intensive animal agriculture has become," Kuehl says.
"This proposal impacts many feed yards, hog farms, dairies and even row crop operations," says Kuehl. "Agriculture is a capital intensive business. Many companies have more than $10 million in gross receipts but have very thin profit margins or even operate at a loss. Further, family businesses much smaller than $10 million of gross receipts would be impacted since the proposal would group related businesses together."
The Farm Financial Standards Council recently issued a statement opposing the change. "For income tax purposes, the Council believes that the cash method currently allowed for farmers and ranchers should be retained," it said. "Switching to the farm accrual method could subject agricultural producers to much larger swings in income due to dramatic market changes that might occur at year-end."
Kuehl expects both the House Ways and Means Committee and the Senate Finance Committee to consider similar measures when formal legislation is introduced in Congress early next year. Unless agriculture works very hard to explain it uniqueness, we could see these provisions included in both the House Ways and Means and Senate Finance Committee bills that will be introduced early in 2014, he says. "That makes me nervous, because once bills are introduced, the concrete may already be set."
Senate Finance Committee Chairman Max Baucus (D-Mont.) initiated the reforms, saying that the tax code is bloated and built for businesses 30 years ago. "The code is completely outdated and acting as a brake on economic growth. More must be done to simplify tax rules, lessen the burden on small businesses and jumpstart job growth," Baucus said in a press release.
Ag businesses differ dramatically from other small businesses,both Kuehl and Neiffer note. Both also doubt agriculture's tax burdens would fall if these provisions are enacted.
Chairman Baucus has asked stakeholders to comment on these "staff discussion drafts" by Jan. 17. For links to the Senate Finance Committee proposals go to http://www.finance.senate.gov/…
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