It appears that our discussions (along with others) with many members in the House plus other communication on the proposed self-employment tax changes has worked. The House in the final Tax Act released today has eliminated all of the self-employment provisions that were in the original Act released last week. This is very good news for most if not all of our farmers. Likely, the only winners under the original proposal would have been regular Schedule F farmers. Those farmers could have seen their self-employment income reduced by at least 30% and in some cases, it may have been completely eliminated.
One additional nice change by the House was to add a 9% maximum business rate (11% in 2018 phasing down to 9%) for the first $75,000 of business income. This applies to all types of business. It will phase-out dollar-for-dollar from $150,000 to $225,000 of income. This provides a reduction in the tax rate for all business income not, just those taxpayers in the 35% and 39.6% tax brackets.
The Senate finally released their framework for tax reform (it is not in Bill form yet). The major items in this framework is as follows:
•Not as much complexity on the tax rate for business income (PERHAPS). Instead of 70/30, etc. the Senate simply proposes allowing a 17.4% deduction for all qualified businesses including most farm operations. However, this deduction is limited to 50% of W2 income subject to withholding for income from S corporations and partnerships. Commodity wage income would likely not qualify since it is not subject to withholding. The framework is vague on how it would apply to partnerships. Also not sure if this would apply to income from passive activities due to limitation of wages from active business to be only allowed wages. This appears to be very similar to the DPAD calculations.◦Example #1, Farmer Sue operates as an S corporation and pays herself $50,000 of wages from the S corporation. The corporation reports $200,000 of income for the year. 17.4% of this number is $34,800. This would be the calculated deduction, however, it is limited to $50% of $25,000.
◦Example #2, same as #1, but Sue only receives $50,000 of commodity wages. In this case, there is no deduction allowed.
•C corporation tax rate of 20% but delayed until 2019.
•Estate tax lifetime exemption would be same as House, however, there is no repeal of estate taxes.
•Minor differences on child tax credits.
•Retains the current 7 brackets instead of House's 4, however tends to reduce each of the current brackets by about 2-3% and has a top tax rate of 38.5% instead of 39.6%.
•The Kiddie Tax now applies at same rates as trusts and estates (a top rate of 38.5% at $12,500 of income - OUCH).
•100% bonus depreciation for 5 years similar to House, but I could not tell if this applies to used equipment. I don't think it does.
•Section 179 increased to $1 million starting in 2018, but no bump to $5 million after five years. Phased-out beginning at $2.5 million.
•No deduction for personal real estate taxes, but home mortgage interest left unchanged (i.e. $1 million limit and 2 homes, however, no home equity interest deduction).
•Appears to be no change to employer provided housing, however, no longer 100% meals deduction.
•Net business losses would be limited to $500,000 for married couples and $250,000 for all others. Any excess is added to net operating loss carryforwards. This would act to prevent business losses being used to offset other income. For example, assume a taxpayer has $2 million for wages and other income. He also loses $1.5 million in his farm operation. Under current law, he can deduct the full $1.5 million against his wages and only pay tax on $500,000. Under the proposal, he can only deduct $500,000 and carry the excess $1 million forward (assuming he is married).
•Farm equipment depreciable lives are changed to five years and now qualifies for 200% declining balance method.
•1031 exchanges limited to real estate, however, if Section 179 is only $1 million and 100% bonus disappears in five years, this may create issues in a few years.
Remember this is a framework and the final workup likely to take place next week will have changes. All-in-all, I really do not see too many major differences between the House and Senate, or at least, I don't see any current fatal ones. Likely, the biggest hang-up will be with the state and local taxes not being allowed as an itemized deduction. Based on the election results from Tuesday, the Republicans will have a very strong incentive to push this through soon.
We will keep you posted.