Commentary: Who wins, who loses in new tax package?
When President Donald Trump signed the new tax reform package into law on Dec. 22, the first call for many farmers and ranchers was to their accountants with a multitude of questions.
The answers, for many, depend on their farm structure, size, income outlook and business goals. Agri-Pulse asked producers from around the country how they viewed the new law, officially known as "The Tax Cuts and Jobs Act."
"All in all, it looks like my tax bill should decrease," said Iowa soybean grower April Hemmes. "But I don't know if that is thanks to President Trump and his tax reform or lower commodity prices."
While Hemmes and most of the producers we talked to were positive, there is still some uncertainty and concern about the longer-term outlook. Here's what we learned:
"Small family C corporations with modest income are big losers," said Gordon Stoner, a Montana farmer and president of the National Association of Wheat Growers. "They will experience a 40 percent tax hike due to the corporate rate going to 21 percent. Previously, family farms that kept their income in the lowest bracket only paid 15 percent."
Stoner said he will explore liquidating his C corporation and electing Sub-S status for his farm this coming year to potentially take advantage of the new rates for "pass-through" entities.
But South Dakota farmer Scott VanderWal said tax reform "won't have a great impact on us," even though his farm has been a C corporation since 1970.
"In really good years like 2007-2013, the 21 percent flat rate would have been very helpful and hopefully will be again," said VanderWal, who serves as president of the South Dakota Farm Bureau and vice president of the American Farm Bureau Federation. "In the current situation where net income is pretty small, we may even see a small increase in taxes due to the lowest rate of 15 percent going up to 21 percent.
"It is important to note, however, that 93 percent of farms file under the individual code and the lower rates with better ranges will be helpful for most farms," VanderWal pointed out. And as employees of the family farm corporation, the lower withholding rates will have an impact sooner rather than later.
With profit margins squeezed, searching for tax breaks has not been a priority for many farmers and ranchers.
"Tax cuts only help when you actually have income that puts in you in a tax paying scenario," said Mark Watne, president of the North Dakota Farmers Union. "Currently, it is hard to project profit with low commodity prices."
He says that "farm program support is much more important at this time to ensure farms can continue to operate," and, despite assurances from congressional leaders that farm bill spending won't be cut, Watne is not so sure.
"The big issue will be on the amount of growth to the economy and the amount of increase to the debt. If the early projections are correct of $1 trillion to $1.5 trillion of increased debt, this may have a huge impact on our ability to write a farm bill," he said.
In general, lawmakers won high marks from producers for continuing cash accounting, the deduction for real estate and personal property taxes on farm business assets, and Section 1031 like-kind exchange deductions for buildings and land. Like-kind exchanges will end for equipment and livestock.
"It will be nice to have Section 179 expanded and the ability to deduct all farm capital purchases through December 2022," said Hemmes. After 2022, this percentage reduces by 20 percent each year until bonus depreciation is eliminated, beginning in 2027.
Wingo, Kentucky, soybean farmer Davie Stephens, who also serves as vice president of the American Soybean Association, agreed that the new provisions for Section 179 small business expensing and bonus depreciation will "really help."
The new law permanently increases the amount of expenditures that can be deducted under Section 179 to $1 million and increases the expenditure level at which the deduction begins to phase out to $2.5 million. The current deduction is limited to $500,000, with the deduction beginning to phase out at $2 million.
Both Stephens and VanderWal applauded moves to double the estate tax exemption and continue stepped-up basis, removing one less worry about estate tax planning for many producers and their heirs. The new law doubles the estate tax exemption to $11 million per individual.
For Hemmes, her estate planning was put on hold until after the bill was signed.
"I was pleased to see that the estate tax exemption was bumped up high enough so I have no worry about my heirs paying federal taxes on the farmland they will inherit," she said.
Karolyn and Bill Zurn farm in northwestern Minnesota with their two sons but each have sole proprietorships. They see many benefits from the new tax law but are uncertain about whether they might change their farm organizational structure in the future.
"Doubling the federal estate tax probably won't affect us," said Karolyn, who also serves as first vice president for American Agri-Women. But the Zurns still have to invest in succession planning, because Minnesota's estate tax only allows descendants to transfer up to $2.1 million in assets to their heirs without paying a Minnesota estate tax.
One group that's very unhappy with the new tax law is grain company owners. They dislike the new 199A deduction that replaced the Section 199 domestic production for cooperatives.
As a result of the new provision, co-op members will be allowed to deduct 20 percent of all payments they receive from their cooperatives, giving farmers a strong incentive to sell to co-ops rather than private or publicly-traded grain companies.
Sen. John Thune, R-S.D., said the new deduction was "designed to mimic what they (cooperatives) got under Section 199, but it went farther than that." Thune and Sen. John Hoeven, R-N.D., who helped write the co-op provisions in the tax bill, are now trying to revise the legislation to address complaints that the bill unfairly favors co-ops and their members.