The Republican-led Congress is rushing to finish the tax bill, but it’s still impossible to tell whether most farmers’ and ranchers’ taxes will go down or up, what affect lowering corporate tax rates might have on rural economies—and what the political impact of the bill will be.
Farm and ranch groups have generally followed expected lines in reacting to the House and Senate bills. The Republican-leaning American Farm Bureau Federation has been generally positive about both bills while the Democratic-leaning National Farmers Union has been opposed.
The NFU has stressed that reducing or eliminating the estate tax could make it harder for Congress to find money for the next farm bill. The NFU and House Democrats have also raised the prospect that the bill’s provisions could result in the sequestration next year of money for current farm programs, but some lobbyists believe that issue will be resolved as Congress finishes the bill.
The National Cattlemen’s Beef Association is thrilled with provisions on the estate tax—the Senate bill would double the exemption for the levy and the House bill would eventually eliminate it. Crop groups have been largely quiet, although the American Soybean Association and the National Biodiesel Board have tried but failed so far to get a multiyear extension of the biodiesel tax credit included in the bill.
Brad Palen, a Kansas-based accountant with K-Coe Isom who has been following the bills in order to advise clients on how to manage “the spikes and valleys” of farm income, said in an interview that he believes the tax effort looks “favorable” for farmers and ranchers overall, but that the impact on individual farmers and ranchers will vary.
The small percentage of big farms and ranches organized as C corporations will fare the best because the bills set a flat rate of 20 percent for corporate taxes, although some smaller farm and ranch C corporations currently benefit from a rate of only 15 percent on the first $50,000 in income, he said.
The changes that will help most farmers and ranchers, he said, are those that allow for immediate depreciation of equipment purchases and a House provision that applies depreciation to used as well as new equipment.
But that bonus depreciation will eventually go away, Palen noted, while farmers have had to give up other tax breaks or see them reduced. Farmers in particular may find themselves disadvantaged by restrictions on using operating losses from previous years as a tax break, Palen said.
The biggest farmers and ranchers were not getting any benefit from deducting state income taxes because they were subject to the alternative minimum tax, but the impact of losing that deduction will depend on state tax rates, he said.
Perhaps the biggest danger for the ag community is the loss of Section 199, a provision that allows farm co-ops to pass production and marketing costs to members as tax deductions. Charles Conner, the president and CEO of the National Council of Farmer Cooperatives, has said the deduction is worth about $1 billion to farmers and that eliminating it could mean a tax increase instead of a decrease.
Farm leaders won the battle to maintain cash accounting rather than the accrual method, but accountants are still struggling to get Congress to use the tax bill to address an IRS ruling they say could cause problems for farmers in the future.
In a Texas case, the IRS ruled that a fourth-generation rancher was not actively engaged in ranching because she owned her land through an S corporation and therefore could not use cash accounting. The Fifth Circuit Court of Appeals ruled against the IRS, which acquiesced to the ruling but said it will still maintain its position in other parts of the country.
So far, Congress has not dealt with the issue, but GOP Rep. Adrian Smith of Nebraska said in an email that he will continue to push for its inclusion. “Cash accounting simplifies tax compliance for farmers and ranchers across the country, and the Fifth Circuit correctly ruled it was congressional intent for all family-managed ag operations to have access to this vital tool,” Smith said. “Producers across the country—not just in Texas, Louisiana, and Mississippi—deserve the certainty of knowing the IRS won’t attempt to penalize them for using a legal accounting technique as their families have for generations.”
The tax bill’s ultimate purpose is to kick-start economic growth, but Palen said low commodity prices mean the impact won’t be as big in rural America.
“The right to write off capital purchases is only significant if you have the money to buy,” he noted.
All these variables and expectations make it hard to imagine farmers and ranchers getting excited about rewarding Republicans for this legislative product.