Farmers assess federal proposal for tax reform


Issue Date: October 4, 2017
By Christine Souza

With the goal of passing federal tax reform legislation by the end of the year, congressional Republicans and President Trump are moving forward with plans laid out in a framework released last week, which includes lower taxes for businesses and individuals and, analysts say, could likely benefit farmers and ranchers.

The plan, titled the "Unified Framework for Fixing Our Broken Tax Code," resulted from negotiations between House and Senate leadership and the White House, and reflects the start of efforts to write tax reform legislation to simplify the code with the goal of growing the American economy.

The manager of federal policy for the California Farm Bureau Federation, Josh Rolph, said he believes the proposal "has a lot of good, some bad, and plenty of details left open for debate." He said agricultural organizations support "a simplified tax code that removes burdensome taxes and helps farmers, ranchers and agricultural businesses succeed, and this tax proposal takes steps toward that objective."

American Farm Bureau Federation tax specialist Pat Wolff noted that the framework would lower tax rates for incorporated businesses, non-incorporated businesses and for individuals, which "comes at a price, and the price is the loss of credits and other deductions. We don't know what those losses are going to be yet, and that's what's important to pay attention to."

Significant for farmers and ranchers, the framework calls for repeal of the federal estate tax, which taxes property as it passes from one generation to the next. The estate tax is currently set at 40 percent above a $5.49 million exemption per spouse.

Ritta Martin of Orland, a sixth-generation rancher who raises goats and assists in a family cattle and sheep ranch, said concerns about the continuing viability of the family ranch are "always lingering in the back of my mind."

"Many of the new tax reform points seem promising for the future of family farms, farms which don't have the cash available to cover the high tax burdens without selling considerable land, livestock and/or equipment that is essential for the future viability of the farm," Martin said.

Though the framework calls for repealing the estate tax as well as the alternative minimum tax, Wolff said it does not specify what would happen to stepped-up basis, which sets the value of land and buildings at what the property was worth when inherited.

"Care has to be taken that Congress doesn't trade the estate tax for a new capital gains tax that would be created if stepped-up basis is lost," Wolff said.

Frederic McNairy, a certified public accountant in Sanger whose clients include those with agricultural and food-processing businesses, said he hopes Congress and the administration can agree on changes that truly reform the current tax system.

"I hope in tax reform that they go bold," McNairy said. "The last reform was in 1986, so for 31 years all they've done is add layer upon layer of more complexity. Every year they throw in more layers, and they need to peel the onion because so much of it doesn't make economic sense."

He said the estate tax "can be a nightmare" for family farm owners who worry they could have to sell a portion of their property in order to pay the estate taxes.

"I have an ag-related processor (client) who is worried about how he is going to pass on his business and pay estate taxes at the same time. Payment of the estate taxes may require him selling all or part of the business," McNairy said.

The framework lays out the following proposed tax reforms:

  • Creates a new tax rate, capped at 25 percent, for businesses organized as pass-through entities (sole proprietorships, partnerships and S-corporations). Pass-through business income is currently taxed at individual rates that top out at 39.6 percent.
  • Sets the corporate tax rate at 20 percent, down from 35 percent.
  • Allows businesses to fully and immediately write off business investments for at least five years. This would include fixed assets such as machinery and buildings, but not land.
  • Eliminates the deduction for state and local taxes, which would penalize higher-taxed states such as California.
  • Includes a partial limitation on the interest deduction for C-corporations. Limitations on the interest deduction for other businesses might be considered.
  • Modernizes rules that govern specific industries. The framework does not mention cash accounting or like-kind exchanges.
  • Reduces the number of tax brackets for individuals from seven to three: 12, 25 and 35 percent, though the plan is so far silent on qualifying income limits.
  • Doubles the standard deduction for couples to $24,000 and for single filers to $12,000.
  • Eliminates most itemized deductions, except for home mortgage interest and charitable contributions. The framework would repeal personal exemptions for dependents, increase the child tax credit and provide a $500 credit for non-child dependents.

Martin, whose husband manages a custom nut harvesting business as a pass-through partnership entity, said navigating through the tax process and determining how each partner will be impacted "is nothing short of complicated. A new, lower rate for this type of income would be very beneficial and allow for possibly faster growth of the business."

Timber operator and Tuolumne County Farm Bureau President Shaun Crook said he believes the framework would succeed in growing the economy.

"There are limited details at this point but in general, I see the Republicans' federal tax plan as a stimulus to the economy, creating more jobs across the board," Crook said. "If Congress is able to increase the take-home income of Americans, it should create more consumers for almonds and wine and other high-value products that we grow in California."

American Farm Bureau Federation President Zippy Duvall called comprehensive tax reform "essential to addressing the financial challenges faced by America's farmers and ranchers."

"The tax-reform framework is an important step toward a fair and equitable tax system that encourages success, savings, investment and entrepreneurship," Duvall said.

(Christine Souza is an assistant editor of Ag Alert. She may be contacted at csouza@cfbf.com.)

Permission for use is granted, however, credit must be made to the California Farm Bureau Federation when reprinting this item.