The Farm CPA: How Tax Reform Might Affect You

The Farm CPA: How Tax Reform Might Affect You

Now that the federal tax extender bill finally has passed, we turn to the possible effects of tax reform on farmers this year. The expiration of the tax extender bill on Dec. 31, 2014, gives lawmakers a clean slate for tax reform in 2015.

The key requirement of tax reform is a reduction in the top corporate tax rate from 35% to about 25%. Advocates argue our corporate tax system is the most uncompetitive compared to the tax systems of our major trading partners. 

Yet most producers file as sole proprietors, partners or S corporations. Therefore, a major reduction in the corporate tax rate will require Congress to find revenue from other sources, which might hit non-corporate farmers. As a result, farmers’ tax bills could go up substantially. 

How I Rank Tax Reform Actions. The chance of tax reform happening in 2015 is strong, and while corporate taxes might decrease, there is a strong chance farmers’ taxes will rise. Here is my assessment of proposed changes and my estimate of the likelihood each adjustment will be adopted.

Reduction In Top Corporate Tax Rate To 25%. A reduction of 10 percentage points in the top corporate rate has a good chance of passage. The reduction will likely be phased in over two to five years. Odds of approval: (4 1/2 out of 5 stars) 

Adoption Of Permanent And Increased Section 179. President Obama and Congress have proposed making Section 179 permanent. Many also would like to see Section 179 increased to a level of $1 million and indexed to inflation in $100,000 increments. Odds of approval: (4 out of 5 stars) 

Elimination Of Cash Method Of Accounting. This method is allowed for all non-corporate farmers, including S corporations and family C corporations with annual revenue of less than $25 million. Some have suggested restricting the cash method if a farm’s average revenue exceeds a threshold of $10 million or even $1 million.

Most assume the elimination of the cash method of accounting would result in a substantial increase in taxes; however, many who have accumulated a large amount of deferred grain income and prepaid farm expenses could spread deferred tax liability over 10 years.

True accrual accounting would require that costs be accumulated and deducted as grain and livestock sales occur. Odds of approval: (3 out of 5 stars) 

Changes In Depreciation. Single-purpose structures, such as dairy parlors and hog confinement buildings, may be depreciated over 10 years. They qualify for both Section 179 and bonus depreciation. Some proposals call for these structures to be considered a building and depreciated over 40 years. They would not qualify for Section 179 or bonus depreciation. Odds of approval: (2 out of 5 stars)

Removal Of Deferred Payment Contracts. Deferred payment contracts allow producers to lock in a price this year and report the income next year. Farmers can also prepay up to 50% of normal farm expenses. If farmers are required to change to the accrual method of accounting, neither will be allowed. Odds of approval: ( 1 1/2 out of 5 stars)

Cap On Section 1031 Tax-Deferred Exchanges. The Obama administration has proposed a cap of perhaps $1 million on the amount of gain that can be deferred each year or, in some cases, a lifetime cap. Discussion also has occurred about whether to make equipment trade-ins fully taxable. I expect this to occur only if Section 179 is made permanent near the $1 million level or greater. Odds of approval: (1 out of 5 stars)

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