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The Farm CPA

RSS By: Paul Neiffer, Top Producer

Paul is now part of the fourth generation in America that is involved in farming and hopes the next generation will be involved also. Through his blog he provides analysis and insight to farmer tax questions.

Tax Reform - Part ?????!!!!!

Feb 26, 2014

Dave Camp, the chairman of the House Ways and Means Committee issued another tax reform proposal today. Since this is a mid-term election year, it has little chance of passing this year, but it is important to note possible changes that Congress is pondering. The major ones affecting farmers are as follows:

  • For individuals, create three tax brackets - 105, 25% and 35%. The 35% bracket would not apply to qualified domestic manufacturing income (QDMI) which would be taxed at a maximum 25% rate. In exchange the current 9% domestic production activities deduction would be eliminated. Almost all farming income would qualify for QDMI which means farmers whether a schedule F or in a pass-through entity would have a maximum 25% tax rate on their farm income (good for farmers).
  • Capital gains and qualified dividends would be taxed at normal rates, however, there would be a 40% deduction, therefore, only 60% of capital gains and qualified dividends would be taxed (fairly neutral compared to current law).
  • The maximum corporate tax rate would be reduced to 25% over five years (good for farmers who farm as C corporations).
  • Accelerated depreciation would be eliminated. All assets would be depreciated over their useful life on a straight-line basis. For example, trees and vines would be over 20 years instead of the current 10. Most if almost all farm real estate including possibly single purpose ag structures would be over 40 years and not the current 10 or 20 years. Some adjustments for inflation may allow for some accelerated deductions.
  • Section 179 would be made permanent at the $250,000 level with the phase-out beginning at $800,000. These two amounts would be indexed to inflation (these provisions mostly bad for farmers)
  • Homeowners would have to live in the home for five out of eight years and you could only do the exclusion once every five years.
  • Mortgage interest could only be deducted on indebtedness up to $500,000 down from the current $1 million. This would be phased-in over four years.
  • Charitable donations would be subject to a 2% of AGI limitation. Contributions of appreciated property would be based on adjusted basis, not fair market value, except for certain exceptions, primarily publicly traded stock.
  • Possible substantial restrictions on the exclusion for corporate provided housing. This would be limited to $50,000 and the exclusion would apply to only one residence (this could substantially restrict the use of corporate provided housing by farm C corporations).
  • For taxpayers who materially participate in an S corporation or partnership, would automatically treat 70% of their earnings from the business (whether taken in the form of salary or distributions) as automatically being subject to self-employment tax. The remaining 30% would not be subject to SE tax. Passive investors would still not be subject to SE tax (this provision most likely bad for material participating farmers).
  • Roth IRAs would be allowed no matter the income level, however, regular IRA contributions would no longer be allowed. Also, no longer allowed to form new SEPs or SIMPLE 401(k)s.
  • Repeal of the Alternative Minimum Tax (AMT).
  • The special deduction for soil and water conservation expenditures would be repealed (could affect some farmers).
  • Intangibles would be amortized over 20 years instead of 15 years.
  • Repeal of percentage depletion.
  • Gain from the sale of timber held for more than one year would no longer be treated as a capital gain.
  • As with the Senate proposals, the House would repeal like-kind exchanges (not good for farmers who trade in equipment or sell real estate).
  • A gain for farmers is that the current rules regarding the cash method of accounting would be retained. Therefore, all farms operating as S corporations, sole proprietors or partnerships would be able to retain the cash method of accounting.
  • Farmers selling property on an installment sale exceeding $150,000 would be subject to the current interest charge rule that applies currently for sales in excess of $5 million.
  • Farm income averaging would be repealed (not good for farmers).

There are hundreds of other provisions in the proposal. Most of the current credits, etc. are eliminated in exchange for the reduction in individual and corporate rates. On the whole, parts of the proposal would help farmers and parts would hurt. There is no chance of the proposal as is passing, however, many of these proposals are similar to the Senate or President Obama's tax reform initiatives and there is a good chance that tax reform will occur over the next few years, but who knows what the final bill will be.

We will keep you posted.

Here is a link to the Section-by-Section Summary of the Tax Reform Act of 2014 Discussion Draft.

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