13 Tax Reform Items Impacting Agriculture12/18/2017
Congress is still working to send a big tax reform package to the White House in time for Christmas. But what’ll be wrapped up inside it still depends on what the “gifts” cost and whose wish list is most likely to be honored.
Based on details from American Farm Bureau Federation, National Milk Producers Federation, the Tax Foundation and other ag law experts, here are 13 items Santa’s elves are considering to put under agriculture’s tree. Please remember, the elves reserve the right to make last-minute changes:
1. State and local tax property tax deductions. They’re retained by both House and Senate, but capped at $10,000 for only 1040As. The business deduction for property tax continues without limits.
2. Co-op dividends. The House and Senate bills both repeal the Domestic Production Activities (Section 199) Deduction. For cooperatives, it would be replaced with a deduction equal to the lesser of 23% of the co-ops taxable income or 50% of W-2 wages paid beginning in 2019 and lasting through 2026.
For individuals, the Senate bill allows cooperative members to claim a new 23% deduction on their taxable income for qualified cooperative dividends – patronage dividends, per-unit retain allocations, qualified written notices of allocations and similar amounts. Washburn University ag law and taxation professor Roger McEowen says that whether or not individuals come out ahead is “highly dependent on the taxpayer’s factual situation.”
3. Estate tax relief. The House doubles the existing exemption to $11 million for individuals and $22 million for couples, and then fully repeals the tax after 2023. The Senate version similarly doubles the exemption levels, but leaves the tax in place until “sunset” after 2025. Both versions preserve a full stepped-up basis for inherited property – avoiding a potential tax increase to offset repealing or reducing the estate tax.
4. Expensing. House and Senate bills would allow farms and other businesses to immediately write off 100% of qualified property costs through 2022.
5. 179 expensing. The House and Senate want to wrap the Section 179 gift differently. The House would temporarily bump up the maximum allowance from $500,000 to $5 million through 2022, and expand it to cover used and new equipment. The Senate would permanently set the maximum allowance at $1 million, but not including used equipment.
6. Interest deductibility. Both bills attempt to preserve farmers’ business interest deduction, but cap net interest deductions at 30% of earnings before interest and taxes. The House cap includes depreciation and amortization.
The House would allow farms with less than $25 million in annual receipts to continue to deduct interest expenses. The Senate would allow farms with less than $15 million annual receipts to continue to do so. However, the Senate version exempts farms from that dollar limit if they agree to follow an alternative set of depreciation rules to offset the cost.
7. Cash accounting. Both measures continue to allow farms to use cash accounting.
8. Corporate rate. Both cut this rate to 20%, but there are differences.
9. Like-kind exchanges. Both limit the use of Section 1031 like-kind exchanges to real property, and eliminate using it for equipment and livestock.
10. 529 college savings accounts. Both bills expand them for some primary- and secondary-education expenses.
11. Net operating losses. The House eliminates NOL carrybacks, but allows carryforwards while restricting the deduction to 90% of current year taxable income. The Senate does essentially the same, but limits the carryforwards to 80%.
12. Pass-through income. The House version caps it at 25%, with a rebuttable presumption “catch” that 70% of that income is wage income (subject to the regular rate schedule), while 30% is business income (subject to the lower rate cap). It excludes many professional service companies from the preferential rate. The Senate bill adopts a 23% income deduction (limited to 50% of wage income) for qualifying businesses, which expires at the end of 2025. Note: That 50% limitation doesn’t apply when filing income is less than $500,000 (joint) or $250,000 (individual).
13. Environmental stewardship. Both wind down Section 48 Investment Tax Credit after several more years. The Agriculture Environmental Stewardship Act provision to expand Section 48 to cover nutrient recovery systems and digesters wasn’t incorporated into either bill.
Source: Farm Progress