Federal Tax Reform
The first major tax package since the 1980s, the Tax Cuts & Jobs Act, was introduced last week in the House Committee on Ways and Means to overhaul our nation's tax code. The Senate tax reform bill is expected to be released this week. Because agriculture operates in a world of uncertainty where running a farm business is challenging under the best of circumstances, farmers need a tax code that recognizes the unique financial challenges we face. Farm Bureau supports replacing the current federal income tax with a fair and equitable tax system that encourages success, savings, investment and entrepreneurship. We believe that the new code should be simple, transparent, revenue-neutral and fair to farmers.
The House tax reform proposal includes expanded, immediate expensing while continuing the business interest deduction important to farmers. It also provides immediate relief from the estate tax with a repeal to follow in subsequent years. Some of the major components of the proposal include:
Business and Agriculture
- The bill does not change the use of cash accounting for farm and ranch businesses except that it raises the accrual threshold for farm corporations and farm partnerships with a corporate partner. Farm Bureau policy supports continuation of cash accounting.
- The estate tax exemption would be doubled starting in 2018 and be permanently repealed after six years. Stepped-up basis is continued. The current estate tax exemption is $5.49 million per person. Farm Bureau policy supports permanent repeal of the federal estate tax, and continuation of full unlimited stepped-up basis.
- The bill is silent on capital gains tax rates. Under current law, taxpayers in the 10% and 15% income tax brackets pay no capital gains taxes. Those in the 25, 28, 33 and 35 percent brackets pay a 15% rate on their capital gains; and those in the top 39.6% bracket pay 20%. Farm Bureau policy supports elimination of the capital gains tax.
- Businesses would be allowed to fully and immediately write off business investments through 2022 under the proposal. Under current law, businesses can take 50 percent "bonus depreciation" in 2017, 40 percent in 2018 and 30 percent in 2019. Fruit and nut-bearing trees, vines and plants can be deducted when planted rather when they become productive. Farm Bureau policy supports immediate expensing at the $500,000 level and accelerated depreciation.
- Section 179 small business expensing would be increased from $500,000 to $5 million. The expenditure level at which the deduction begins to phase out increased from $2 million to $20 million. The provision would be effective for tax years beginning after 2017 through tax years beginning before 2023. Farm Bureau policy supports making permanent $500,000 of expenses to be deducted under Section 179 and indexing the amount for inflation.
- Section 1031 like-kind exchange deductions for buildings and land (real property) would be continued. The provisions would end for equipment and livestock. Farm Bureau policy supports the continuation of like-kind exchanges.
- Section 199 Domestic Production Activities Deductions would be ended. Farm Bureau policy supports continuation of Section 199 deductions.
- The corporate tax rate would be set at a flat 20 percent and the pass-through rate at 25 percent, down from 35 percent.
- Income from pass-through businesses (sole proprietorships, partnerships and S-corporations) will be divided into two categories. Thirty percent of profits will be considered a return on investment and taxed as business income with a maximum 25 percent rate. Seventy percent of profits will be considered a return on labor and will be taxed at the individual rates of zero, 12, 25, 35 and 39.6 percent. Under current law, all pass-through business income is taxed at individual rates. There are currently seven individual tax brackets: 10, 15, 25, 28, 33, 35 and 39.6 percent. Farm Bureau believes business tax reform must be comprehensive and include rate relief for pass-through businesses as well as corporations. Effective farm rates must be low enough to make up for lost deductions and credits.
- The Alternate Minimum Tax (AMT) would be repealed. Farm Bureau policy supports repeal of the AMT.
Individuals and Families
- Lowers individual tax rates for low- and middle-income Americans to 0, 12, 25, and 35 and continues to maintain 39.6 percent for high-income Americans. There are currently seven regular individual income tax brackets: 10, 15, 25, 28, 33, 35 and 39.6 percent.
- Increases the standard deduction from $6,350 to $12,000 for individuals and $12,700 to $24,000 for married couples.
- Establishes a new Family Credit, which includes expanding the Child Tax Credit from $1,000 to $1,600; provides a credit of $300 for each parent and non-child to help dependent families with their everyday expenses, and preserves the Child and Dependent Care Tax Credit.
- Continues the deduction for charitable contributions for those who donate to their church, charity or community organization.
- Preserves the current home mortgage interest deduction for existing mortgages and maintains the home mortgage interest deduction for mortgages up to $500,000 on newly purchased homes.
- Continues to allow people to write off the cost of state and local property taxes (SALT) up to $10,000. We understand farms filing Schedule F returns should not be affected.
- Retains popular retirement savings options such as 401(k)s and Individual Retirement Accounts.
There are three main factors affecting how farmers are impacted by the federal tax code. The first is that most farms file through the individual code, not the corporate code. The second is that a vast majority of an average farm's assets are tied up in long-term assets. The third is that farm income is unpredictable. It is imperative that federal tax reform recognizes the unique financial challenges farmers face in managing their businesses and keeping their farms running from one year to the next and one generation to the next.
The tax reform package is not perfect for agriculture, and there are areas of concern such as ending Section 199 Domestic Production Activities Deductions, but will getting a 20 percent tax rate offset that loss? The temporary nature of some provisions is concerning and would create uncertainty. This includes the Section 179 expensing allowance that includes increasing limits, but would end after 2022. There is also concern this could create a situation where farmland rental income and income that currently is not subject to self-employment taxes would become taxable and negate potential tax reductions in other areas. We continue to monitor and evaluate the entire package being considered and will post on social media and the Kentucky Farm Bureau website timely updates on key components of the bill.
We do anticipate this legislation to move quickly through Congress with the goal of having passage by the Thanksgiving break. Farm Bureau leaders are urged to contact their member of the US House of Representatives and both Senators to ensure that concerns are addressed and key elements of tax reform that Farm Bureau policy supports are included in the final bill. Contact information for your Federal legislators can be accessed here. Kentucky Farm Bureau policy supports federal tax reform with changes based on sound economic principles that create a more competitive business climate. A section-by-section breakdown of the bill as well as additional resources on federal tax reform can be accessed here.
For additional information on the tax reform proposal being considered by Congress, go to the Kentucky Farm Bureau Action Alert page, or contact the Commodity Division at 502.495.7738 or by emailing Joe Cain at firstname.lastname@example.org.