Barbara Irene Blog: The Impact of Tax Reform on Agriculture

At the end of 2017, President Trump signed into law the 2018 tax reform bill. The bill, which includes hundreds of structural changes to the tax code, has been supported by several agriculture industry representatives. This is because the bill will hopefully lower tax liabilities and simplify the process for tax management.

The bill offers four main benefits to farmers and ranchers.

1. Tax relief for pass-through business income

According to Forbes¹, one of the most significant changes under this new bill is the tax treatment of businesses. “The new law states that business income that passes through to an individual from a pass-through entity and income attributable to sole proprietorship will be taxed at individual tax rates less a deduction of up to 20% to bring the rate lower.”

National Cotton Council President/CEO Gary Adams commented, “As you know, many family farms are structured as pass-through entities, and we appreciate the provisions to specifically provide tax relief for these entities.”

The 2018 tax reform will allow farmers to take a 20% deduction off business income

This section of the new tax code, known as the Section 199A deduction, is already familiar to cooperative members. It replaced the Section 199 domestic production deduction and provides significant tax savings on grain sold to cooperatives. To qualify for the deduction, the farmer must sell to the co-op and be a patron of the co-op. The Section 199A deduction allows the farmer to deduct 20% of the value of his grain sales to the co-op from his taxable income.

The new Section 199A deduction has already created controversy, as private or publically traded grain companies have rightly noted that this provision favors grain sold to a cooperative over sales to privates. For example, considering a farmer with $5 million in sales to a co-op and $4 million in expenses, the 20-percent deduction would be worth the entire $1 million in profit, leaving no taxable income.

But a farmer who isn't a co-op member would have to take the 20-percent deduction against the $1 million in earnings, leaving taxable income of $800,000—and a tax liability of $296,000.

Republican Sens. John Thune of South Dakota and John Hoeven of North Dakota, who helped write the co-op provisions in the tax bill, are now trying to revise the legislation to address the complaints.

2. Lowered individual tax rates

94 percent of farmers pay taxes as individuals and will benefit from lowered tax rates. Because 94% of farmers and ranchers pay taxes as individuals, the lower individual tax rates associated with the new tax bill will provide a benefit. “The lowering of individual tax rates will further help alleviate the tax burden on families,” stated Adams.

Pat Wolff, a tax specialist with the American Farm Bureau, noted that the bill also leaves intact some important tax tools for farmers. "The bill also maintains all of the important deductions and credits that farmers rely on. So, farmers have all the tools that they've always had to manage their businesses."

3. Estate tax exemption

Estate taxes, long opposed by many farm groups, can make it financially difficult for farmers to transition their operations to the next generation. The new tax bill doubles the estate tax exemption to $11 million per person, which should eliminate this concern for the vast majority of farmers and ranchers.

4. Expensing capital investments

The reformed tax code also allows businesses, like farms, to immediately write off the cost of new assets. Prime examples for the farmer would be new combines, tractors and other equipment.

One drawback—this provision has a five-year lifespan, at which point it will either expire or need to be re-enacted by Congress.

Temporary solutions

Like the capital expense provision, many of the new individual and small-business tax provisions are temporary. Ag advocacy groups, like the American Farm Bureau, are working to make these 2018 tax reforms permanent.

NOTE: VistaComm does not provide financial advice. We recommend you contact your tax professional with any questions you have concerning the new tax laws.