A tax reform bill is on its way to President Trump today after the House and Senate approved House Resolution 1, the Tax Cuts and Jobs Act.
The legislation, which passed both chambers of Congress along party lines, is expected to provide tax relief for most farmers, said John Kran, national lobbyist with Michigan Farm Bureau.
“There will always be some exceptions to the rule, but we believe that the vast majority of farmers will find at least some tax relief,” he said. “Farm Bureau will continue to analyze the bill and provide additional information to our members.”
The legislation is welcome and past-due, said Carl Bednarski, President of Michigan Farm Bureau.
“While the specific provisions in the bill will be analyzed extensively in the coming weeks, we feel that the legislation will be good for farmers and allow them to keep more of their money and preserve the family farm without having to carve it up for tax liabilities,” he said. “Michigan Farm Bureau applauds Congress for passing comprehensive tax reform. Farm Bureau and the ag community worked hard over the past several months with members of the House and Senate to make sure critical tax provisions supported in member policy were included in this bill. Farmers need a tax code that helps level the good times and the bad, and allows for long-term investment in things like land, equipment, buildings, trees and livestock. It appears this bill will better position most farmers moving forward,” he said.
Under the legislation, pass-through businesses (sole proprietorships, partnerships and S-corporations) will be able to deduct 20 percent of their business income, according to AFBF. The provision sunsets on Dec. 31, 2025.
Business income includes payments from cooperatives, commodity wages and farmland rental income. The deduction can be carried forward in loss situations. Trusts and estates will be able to use the deduction.
Cooperatives will be allowed to take the deduction when determining their taxable income. The following limitations will apply:
- The deduction is limited for partnerships and S corporations to 50 percent of W-2 wages paid to employees OR the sum of 25 percent of W-2 wages paid plus 2.5 percent of depreciable business property.
- The W-2 limitation does not apply to taxpayers when taxable income does not exceed $315,000/$157,000 joint/individual and would be completely phased out when income reaches $415,000/$207,000 joint/individual.
- The deduction is not available to some service businesses, for example veterinarians, with taxable income over $150,000. The deduction for service businesses starts to phase out at $50,000 of income.
- C-Corporation Businesses: The bill sets the corporate tax rate at a flat 21 percent instead of the current 15 percent, 25 percent and 34 percent and 35 percent brackets.
Farm Bureau policy:
- Supports the permanent increased expensing limits for Sec. 179 small business expensing of $1 million indexed for inflation.
- Supports unlimited immediate expensing (bonus depreciation).
- Supports that farmers and ranchers will continue to be able to immediately deduct normal and customary business expenses including but not limited to feed, seed, fertilizer, chemicals, and fertilizer.
- Supports shorting the depreciation period of farm equipment and machinery from 7 to 5 years.
- Supports continuation of the unlimited business deduction for state and local taxes.
- Supports allowing citrus growers to expense the cost of replanting groves that have been destroyed by citrus greening.
Section 179 small business expensing:
Farmers and ranchers use Sec. 179 to immediately write-off the cost of purchases rather than having to depreciate the assets over time. Sec. 179 deductions can be used for both new and used machinery and equipment, livestock, single-purpose agricultural and horticultural structures, and bulk storage facilities for commodities and fuel.
The bill permanently increases the amount of expenditures than can be deducted using Sect. 179 small business expensing from $500,000 to $1 million and increases the expenditure level at which the deduction begins to phase out from $2 million to $2.5 million, indexed for inflation.
Immediate expensing (bonus depreciation):
Farmers and ranchers generally use bonus depreciation when expenditures exceed the Sect. 179 small business deduction limits. All farm structures qualify for the bonus depreciation deduction. Fruit and nut-bearing trees, vines and plants can take the deduction when planted rather than waiting until they become productive.
The bill allows businesses to fully and immediately write off business investments through 2022 and expands the deduction to include used as well as new purchases. After 2022, the percentage deduction reduces by 20 percent each year until bonus depreciation is eliminated beginning in 2027.
Under current law, businesses can take 50 percent “bonus depreciation” in 2017, 40 percent is 2018 and 30 percent in 2019.
Depreciation of farm machinery:
The bills shorten the depreciation period for farm equipment and machinery from 7 to 5 years.
Business deduction for state and local taxes:
The complete deduction for state and local taxes will continue for farm and ranch business as a deduction on Schedules C, E and F.
Section 1031 like-kind exchanges:
Farm Bureau policy supports the continuation of like-kind exchanges, and believes the new law will support the continuation of like-kind exchanges for buildings and land.
Farm Bureau analysts also believe that the impact from eliminating like-kind exchanges for equipment and livestock will be minimal because of expanded deductions for the full purchase price of replacement equipment and livestock.
The bill continues the Section 1031 like-kind exchange deduction for buildings and land (real property). Like-kind exchanges would end for equipment and livestock.
The bill doubles the estate tax exemption from $5.49 million to $11 million and indexes the exemption for inflation. It sunsets Dec. 31, 2025.
Farm Bureau policy supports permanent repeal of federal estate taxes, and insists that full unlimited stepped-up basis at death should continue.
Farm Bureau also:
- Supports provisions in the bill that double the exemption amount indexed for inflation and continues spousal portability. An increase in the exemption is viewed as an incremental step toward the goal of repeal.
- Supports that the bill does not change stepped-up in basis.
Stepped-up basis continues unchanged as is the transfer of any unused exemption amount to a surviving spouse.
Self-employment (SE) taxes are a significant expense for farmers and ranchers because as self-employed individuals they bear the combined employer and employee contribution of 15.3 percent.
Farmers who pay their taxes as sole-proprietors or as a member of a partnership pay SE taxes on their net business income.
Farmers and ranchers who organize their businesses as an S-corporation pay Social Security taxes (FICA and Medicare) on the portion of distributions that are classified as salary or wages. Farm Bureau supports that the bill does not change laws that determine the SE taxes that farmers and ranchers pay.
Capital gains taxes:
Farm Bureau policy supports eliminating the capital gains tax and supports that the bill keeps capital gains tax rates and thresholds at approximately the same rates and thresholds as exist under present law.
Farm Bureau policy supports the continuation of cash accounting. Farm Bureau supports that the bill does not change the use of cash accounting for farm and ranch businesses except that it expands the number of farm corporations and farm partnerships with a corporate partner that can use cash accounting.
Deduction for business interest expense:
Farm Bureau policy supports a deduction for business interest expenses. Farm Bureau supports that the bill continues the interest deduction for businesses with less than $25 million of gross receipts indexed for inflation. The deduction is limited for businesses over the threshold, but there are very few agricultural producers with more than $25 million of gross receipts. Carryover rules are available to apply the excess interest expense to future years.
Alternative Minimum Tax (AMT):
Farm Bureau policy supports repeal of the AMT. The bill permanently repeals the Alternate Minimum Tax for C-corporations. The bill continues the AMT for individuals but increases the threshold used to determine when AMT is owed. Sunsets Dec. 31, 2025.
Net operating losses (NOL):
The bill allows NOLs to be carried forward indefinitely instead of current law 20 years but limits NOL to 80 percent of income. NOLs can be carried back for two years instead of the five years as currently allowed for farms and ranches.
Section 199: Co-ops domestic production activities deduction: Farm Bureau policy supports continuation of the domestic production activities deduction but believes that lower tax rates and the new business income deduction will compensate for the elimination of the Section 199 Domestic Production Activities Deduction.