January 4, 2018

Tax Reform: Short-Term Wins, Long-Term Losses

 |  By: Anna-Lisa Laca

Just before Christmas, President Trump signed a new tax code into law. This is the first major tax overhaul since 1986, when President Reagan was in office. Many agriculture groups, including American Farm Bureau Federation (AFBF), say the new law is a “net benefit” for farmers. But, did you know not all of the provisions that benefit farmers are permanent?

According to Brian Kuehl, federal affairs director for KCoe Isom, on average farmers will do better under this bill, but some farmers will pay more in taxes. Kuehl isn’t saying that without adequate research to back it up. KCoe analyzed tax returns from 20 model farms of all sizes and variety against the new tax bill to see exactly how the law will impact small, medium and large farms. 

“In the short-term, it is clear most farmers will pay less,” he told Clinton Griffiths on AgriTalk in December.

However, some tax provisions that will provide farmers tax relief are set to expire beginning in 2022, and that could cause a pain point for farmers.

“In the long-term we could see a tax increase,” Kuehl says. “A lot of the good provisions for farmers, [for example] the pass-through rates, are set to expire. Some of the bad provisions for farmers, like deductions they are used to taking, are gone for good.”

Pat Wolff, senior director of congressional relations at AFBF says the organization considers the bill a win, overall. 

“In addition to lowering the tax rate, almost all of the important deductions and accounting methods farmers use stayed in the bill,” she says, reminding farmers that the tax savings won’t go into effect until next year when they file their 2018 taxes.

Long-Term Losses

There are several provisions that are set to phase out or expire, beginning in 2022. According to Jim Wiesemeyer, ProFarmer’s Washington policy analyst, that’s because Senate rules dictate the bill could not create a deficit after 10 years. Here are the expiring provisions likely to impact farmers:

Individual Tax Rates – The new tax code lowers the individual tax rates to create the following eight brackets:  0%, 10%, 12%, 22%, 24%, 32%, 35%, and 37%. However, Wiesemeyer says these go back to the 2017 tax brackets in 2026.

Standard Deduction – In an attempt to reduce the number of tax payers who itemize their tax returns, the new bill increases the standard deduction. Under the new code it’s $12,000 for individuals and $24,000 for married couples. This too goes back to the previous law in 2026.

Child Tax Credit – The child tax credit is $2,000 per child, with $1,400 of this refundable for families who have no income tax liability. This credit phases out starting at $400,000, according to Wiesemeyer and reverts back to the previous rate in 2026.

Estate Tax – The new tax code doubles the estate tax exemption, which many people including, Wolff, say is a big win for agriculture. The new exemption level of $11.2 million for individuals and $22 million for couples will mean very few farmers pay the tax, she says. It’s important to note that stepped-up basis stays intact and the exemption level will continue to be adjusted for inflation. It’s critical to note that the estate tax exemption levels revert back to 2017 levels beginning in 2026. “As long as there is a threat that lower exemption levels will come back, farmers and ranchers will continue to have to spend money on estate planning,” Wolf says.

Pass-Through Businesses:The new code allows for a deduction of 20% of up to $315,000 income, Wiesemeyer says. The 20% deduction is capped at either 50% of wages or 25% of wages plus 2.5% of capital assets, whichever is greater. This provision reverts back to the 2017 law beginning in 2026.

Immediate Expensing and Bonus Depreciation – Under the new tax code, farmers can write off equipment in the first year. That’s a big win for farmers, Kuehl says. In addition, the new law increases the limits on Section 179 and makes bonus depreciation 100% again. The downside is that bonus depreciation will start phasing out in 2022. “So in the short-term we have a good provision that will really help farmers,” Kuehl says.

According to Wolff, Farm Bureau is already working to make these provisions permanent.  She says it is critical farmers have tools that help them to manage risk in today’s agriculture economy.