Farm Progress

Legal Issues: New tax legislation advancing in Congress will affect farm families and agriculture.

Erin Herbold-Swalwell

November 20, 2017

5 Min Read
TAX PLAN: Current tax reform legislation being considered by Congress would preserve key provisions for farmers, such as interest expensing and immediate expensing, and would phase out the estate tax.

Tax reform is now the top policy priority in Washington, and so far, it appears the bill proposed by the House includes significant changes to current law that would impact farm families in numerous ways. Tax reform is expected to proceed under a budget reconciliation process that allows a 50-plus-one simple majority vote in the Senate.

As with prior legislative efforts relating to health care reform, it remains to be seen what the final result of tax reform efforts will be. However, it is important for those involved in agriculture to have an understanding of the congressional efforts in light of the fact that most farmers are beginning the process of planning for next year and meeting with their farm accountants to finalize their tax plans for 2017.

The House proposal  rundown
The House Tax reform bill (H.R. 1) released Nov. 2 and passed out of the House Ways and Means Committee on Nov. 9, aims to simplify the tax code, but is complex in many ways and would significantly change current tax law. As others have opined, the bill offers “a mixed bag” for agriculture.

• Phaseout of estate tax. The bill proposes to double the exclusion amount (from $5 million per individual and $10 million per couple indexed for inflation) starting in 2018, leading up to a full repeal of the estate tax and generation-skipping transfer tax effective Jan. 1, 2024. Interestingly, the gift tax would stay intact with a $10 million exclusion amount, adjusted for inflation. And in 2023, there would be a new lower top rate of 35% (down from 40%). Remember for 2018, the estate tax exclusion amount will be $5.6 million per person and $11.2 million per couple, with a tax rate of 40%.  

• Annual gift tax exclusion. The bill proposes to keep this exclusion in place ($14,000 for 2017; $15,000 for 2018, etc.)

• Section 179 expensing. The bill proposes to allow full expensing for businesses to immediately deduct capital expenses from taxable income on property of up to $5 million (as opposed to $510,000 in 2017). The changes would sunset in five years.

• Incentives for small businesses. One proposal in the House bill is an effort to offer a lower tax rate for “pass-through” businesses, providing that “qualified business income” (income from passive business activities) of an individual from a partnership, S Corporation, or sole proprietorship would be taxed at a rate no higher than 25%. For more information, Kristine Tidgren and the ISU CALT provide an in-depth explanation of the proposal

• Self-employment tax. The House Ways and Means Committee removed language that would have subjected rental income to self-employment taxes for landlords and farmers that lease land back to family partnerships, thus, avoiding a significant tax increase for many farm families.

• Renewable energy. What about wind, biodiesel and other renewable energy tax incentives? The bill provides a 30% investment tax credit for solar energy and small wind energy projects that begin construction before 2020. The bill then proposes to phase out this ITC for projects beginning construction before 2022. The extension of the $1 per gallon biodiesel blenders tax credit, which expired at the end of 2016, was not included. Sen. Charles Grassley is expected to lead an effort to extend the credit.

• Areas of concern. Some in the ag industry are worried about the proposed limitations in the bill, such as restrictions on interest expense deductions, the elimination of the domestic productions activities deduction and limitations on like-kind exchanges. Surely, all of these provisions will be debated. Of course, there are those in the industry who are critical of congressional efforts to cut tax rates and repeal the estate tax because of the widely discussed increase to the federal deficit.

The Senate Plan: What’s different?
Shortly after the House filed H.R. 1, the Senate announced its own plan on Nov. 9. Below are some brief highlights of the differences in the House and Senate bills:

• The Senate bill does not phase out the estate tax, but it does propose to double the exclusion amounts. For instance, the exclusion amount proposed for 2018 would be $22.4 million for couples and ($11.2 million for individuals). The Senate bill so far doesn’t address the generation-skipping tax, the gift tax or stepped-up basis. According to some commentators, the estate tax fight is “just starting.”

• Section 179 expensing increased to $1 million and expanded to include more items.

• The 50% bonus depreciation increased to 100% full business expensing for investments purchased from Sept. 27, 2017, to Dec. 31, 2022.

Plan now, adjust later
One of the most important issues to address in the midst of major tax reform is how to plan in the midst of uncertainty. This is one of the most difficult areas to address with clients and makes the planning process more difficult. My advice is to plan for now and keep that plan flexible enough that the plan can be adjusted later, if changes occur.

Whether you are creating an estate plan, a business succession plan, a tax plan or an operating plan, it is always better to create a plan that works for your family given the current state of your operation and current laws and regulations. Reviewing your plan and staying up to date on changing laws, regulations and new ideas is always important. As always, consult with your farm tax preparer, financial adviser or attorney to understand the impact of tax reform on your operation. This time of the year, most of these advisers are attending continuing education and staying informed of these legislative efforts.

Looking ahead: The farm bill
This Legal Issues column is current as of Nov.10. We will update this column and our readers as Congress works to pass tax reform.  Of course, once the tax reform debate is concluded, the farm bill will most likely take center stage. Our next column will focus on congressional efforts in that arena and changes proposed for farm programs.

Herbold-Swalwell is an attorney with Brick-Gentry PC in Des Moines. Contact her at [email protected].

About the Author(s)

Erin Herbold-Swalwell

Erin Herbold-Swalwell is an attorney with Wickham & Geadelmann PLLC.

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