San Joaquin Farm Bureau Federation

By Craig W. Anderson

In December, President Trump signed the Tax Cuts and Jobs Act, a significant revision of tax code that went into effect Jan. 1, an act that raised questions and concerns among the agricultural community.

“The mechanisms used to implement this policy … are significantly more complicated than a simple reduction in tax rates,” said Eric Krienert, director, Moss Adams, an agribusiness practice in Stockton. “With the signing of the tax act, the tax landscape changes significantly for farmers.”

Farmers, ranchers and the CFBF are continuing to analyze exactly how it will impact agriculture and how the new law might influence business decisions for the state’s and the counties diverse commodities, farm sizes and regions.

Krienert commented that tax law could significantly influence behavior resulting in a number of business outcomes. 

With this in mind, the ag industry can anticipate a follow-up bill in 2018 to address some of the new law’s unforeseen impacts.

Estate tax changes

The estate tax changes will undoubtedly be examined closely by farmers as it has been doubled from $5 million to $10 million and indexed for inflation. “It’s anticipated that the inflation indexed number will be approximately $11,200,000 which allows a husband and wife to pass on over $22 million without estate taxes,” said Gary Daniel, CPA and partner with Bowman & Company, LLP, in Stockton.

This increase in the estate tax exemption will provide a real benefit to succession planning for farmers who struggled under the old rule about how to pass their farm to the next generation. Now, moving a much larger estate on to family members doesn’t face the risk of liquidating farmland and other assets upon death. However, the new exemption amount sunsets in 2025 unless Congress extends the existing law.

Certain of the tax law’s provisions that will probably influence farmer’s business decisions include farmers who sell to a cooperative will receive a deduction equal to 20 percent of the income received from the cooperative.

“This is significant because this is based off of the total income from the cooperative as opposed to the net income for the Qualified Business Income,” said Daniel. “Farmers operating their business in an entity other than a C corporation will receive a 20-percent deduction for Qualified Business Income [QBI].”

Selling to co-ops not that simple

However, a provision in the new tax law provides an unexpected tax break to farmers who sell to cooperatives instead of private buyers: it allows farmers to deduct 20 percent of their gross sales to co-ops but only 20 percent of their net income if they sell to other companies. The difference is sufficiently large to ensure that farmers who sell to co-ops could eliminate their tax bill entirely.

“Unfortunately, this deduction doesn’t reduce qualified capital gains or corporate dividends,” Krienert explained. “So dairy farmers who receive a significant amount of their income from the sale of culled cows won’t see as much benefit from this deduction because cow sales are considered to be capital gains.”

The ag industry will experience a dramatic change in to whom farmers sell their product.

“For example, a farmer selling $2 million of commodities and has a net farm income of $200,000, will receive a $40,000 deduction if they’re selling to a private handler/processor,” Krienert said. “But they’ll potentially receive $400,000 deduction if they’re selling to a cooperative.”

He added, “As you can imagine, private handler /processors aren’t happy about his provision. Many have started asking questions about how they can form co-ops or have complained to senators and congressmen to get this provision changed through a technical correction.”

But Krienert urged caution for those looking to start a co-op because “co-ops have lots of nuances that most attorneys and CPAs don’t understand. If new co-ops are set up incorrectly, it’s likely that the IRS could consider them [to be] sham entities and remove the benefits of this new deduction and possibly subject the co-op’s income to double tax.”

Greg Ibach, undersecretary at the USDA said the tax code shouldn’t “pick winners and losers” and the agency expects a correction. However, it’s not clear the legislation can be reworked, given the partisan divide inside the Beltway, which leaves many companies with the prospect of having to pay more for crops than co-ops would until the discrepancy is resolved.

Other changes

Changes in the law also reduce the top individual tax rate from 39.6 percent to 37 percent; the annual gift tax exemption is raised to $15,000; C corporation farming operations qualify for a flat 21 percent tax rate; and for non-itemizing taxpayers the standard deduction for married filing joint taxpayers has been raised to $24,000.

Huge win for ag

In what can be called a huge win for agriculture in the new law, business expensing has been doubled to $1 million in equipment purchases with a phase-out of up to $2.5 million and the depreciation for new farm machinery has been shortened from seven to five years with the declining balance method increased to 200 percent from 150 percent.

IRS will have more to say

“There are additional rules that will affect the application of these, and other, rules,” Daniels said. “Also, over the coming months the IRS will issue their interpretation of the new law.”

Corporate tax rate reduced

The cut in the corporate tax rate and international tax rule changes are permanent to encourage long-range planning but other business provision sunset in only eight years. Two individual tax provisions are permanent: first, changes to a slower measure of inflation means thresholds for tax brackets increase more slowly which leaves more households in higher brackets that under the previous law and second, the individual health insurance mandate and penalty of the Affordable Care Act have been eliminated.

More money to spend on ag products

With more money in their pockets due to the new tax law, it’s anticipated that most Americans will spend more on food and other agricultural products. 

While the big drop in the corporate tax rate is a net gain for farmers, the exact benefit remains to be seen.

Another benefit is that depreciation rules and immediate expensing are set for a longer period than businesses have seen for decades. This should give them more confidence in the consistency of tax treatments and spur capital investment. Overall, farmers and the agribusiness industry should be cautiously optimistic about the new tax law.

Other provisions to the tax bill include the continued allowance for the business interest deduction, repeal of the Alternative Minimum Tax for corporations and an increased AMT income exemption individuals plus the repeal of the Affordable Care Act individual mandate.

Significant provisions not permanent

“We must also keep in mind,” Daniels said, “that significant provisions expire in 2025 when a future president and Congress will have to deal with them.”

Farmers should consult

A challenge for the industry could be predicting the outcome for each farm, a difficult process because everyone’s business is different. Farm Bureau strongly recommends farmers speak to a CPA early in the year about how the tax plan could affect their operation as it may be time to consider a new business structure, make business purchases or revisit an estate plan.

Farm Bureau also recommends members reach out to their county Farm Bureaus to share what’s working and what’s not, so Farm Bureau can take these stories to Washington.

CFBF contributed to this story.