The ongoing tax negotiations in Congress are complicated and have numerous possible implications for farmers, ranchers and growers, experts say.
AgWeb.com asked K·Coe Isom experts Ryan Stroschein, manager of federal affairs based in Washington, D.C., and Brad Palen, a senior ag accountant based in Salina, Kan., to share their insights on how the legislation is shaping up and what it might mean in farm country.
What aspects in the House and Senate versions of the tax bill do you think are most likely to win approval in the final version, specifically those items that will affect farmers, ranchers and growers?
- The bill will significantly lower the corporate tax rate. This has been the primary objective of the reform effort from the outset. This will benefit the relatively small number of farmers who operate within a c-corporation and may make that uncommon structure more attractive to operations going forward.
- The bill will, for the first time, create a separate and lower tax rate or deduction for pass-through entities, which is a business structure very commonly utilized in agriculture today.
- The bill will allow for enhanced depreciation in the early years of the legislation, which will assist some farmers in expanding or modernizing their farming operations.
- The bill increases the exemption for estate and gift taxes, which will help transition larger farms and ranches to the next generation.
- The bill preserves the ability of farms and many agricultural companies to use the cash-basis method of accounting that has been critical in managing the volatile income spikes and valleys inherent in agriculture.
What might be the three biggest positive takeaways from the forthcoming tax legislation for farmers?
- The bill will, for the first time, create a separate and lower tax rate or deduction for pass-through entities, which is a very prevalent agriculture business structure.
- Through bonus depreciation and section 179, the bill will allow for enhanced expensing of capital expenditures, at least in the early years of the legislation, which should assist some farmers in expanding or modernizing their farming operations.
- The bill increases the exemption for estate and gift taxes will help transition larger farms and ranches to the next generation.
What might be the biggest drawbacks or potential challenges, from a business perspective, from the forthcoming tax legislation for farmers?
- Many of the beneficial provisions in the proposals, such as enhanced expensing, business pass-through rates, and the elimination of the alternative minimum tax, are set to expire in future years. This despite that fact that the provisions less beneficial to farmers are permanent. If the beneficial provisions are not extended, it could deprive agriculture of many of the advantages of the legislation.
- The bill severely restricts the ability to carry back net operating losses, which has always been more generous for agriculture than other sectors and widely utilized to smooth out the income volatility in the sector.
- The bill limits like-kind exchanges to real property only. This will have an impact on some producers in the immediate term and could become particularly detrimental if the bill’s capital expensing provisions expire in future years.
- The bill places limitations on business interest deductibility for larger ag businesses.
- The bill will limit or eliminate the domestic production activities deduction (DPAD) which impacts ag cooperatives and certain farmers.
- One of the bill’s goals is to simplify the tax code, but the pass through deduction mechanism appears to be quite complicated.
What questions should farmers be asking their CPAs and CFOs in the weeks ahead?
- Am I in the most tax favorable entity structure to benefit from these new provisions? Does it make sense for me to operate in a different environment, such as C-corporation?
- How does the estate and gift exemptions help my business and my succession plan? Is now the time to do succession planning?
- Given the number of sunsetting provisions in the bill, what should my plan be for my business for the next 5 years? After the sunsets?
- How will the proposed changes to net operating loss carryback impact my business in the short and long-term?
- What planning do I need to do if I want to do a like-kind exchange on my all or part of my land?
When do you expect we will have the final version of the legislation enacted into law?
We expect the conferees to work diligently to reconcile the two bills over the next week. The long-stated goal has been to get this legislation to President Donald Trump's desk in this calendar year, and congressional Republicans have consistently hit each of their target objectives on this bill over the past couple of months.
They need to get a final package that squeezes into the fiscal straight jacket they have made for themselves, but the Republican caucus is clearly committed to passing a bill so the vote on the conference report shouldn’t be a difficult one once the package is finalized.
Beyond the language of the final legislation, what do you think the broader implications of a revised tax code will be for the ag economy? And the U.S. economy more generally?
- The reformed tax code should be marginally positive for agriculture, particularly if the temporary provisions are made permanent.
- The bill may drive significant business restructuring.
- The bill injects more complexity in the tax code for many businesses – particularly if the House version for pass-through businesses tax rates is adopted.
What implications, if any, will the tax code revisions have for the ongoing discussions about trade with Canada and Mexico, specifically, and the possibility of moving away from NAFTA? Are there tax provisions that would be more favorable for domestic production or consumption of U.S.-produced food? Or perhaps tax provisions related to labor that would present a challenge to U.S. farmers that hire temporary workers from other countries?
What other comments would you like to make?
The process they used to pass this bill did not allow adequate time for its provisions to be understood and its impacts assessed. It is likely that the bill will have impacts that the tax writers did not anticipate.
Changes of this magnitude within the Internal Revenue Code will require considerable time before many of the provisions are truly understood, and implementation of the regulations surrounding this legislation could take years.