Just before Christmas, President Trump signed the Tax Cuts and Jobs Act, which Republicans had passed on a party-line vote a few days earlier. Now that 2018 has arrived, the law has come into effect. What will that mean for California farmers and ranchers?
The bill moved quickly through Congress, and we continue to analyze exactly how it will impact agriculture. The law is no less complicated than previous tax law, and it will take time to assess the pros and cons, learning how it might influence business decisions for our state's diverse commodities, farm sizes and regions.
We can offer preliminary assessments—and we can also report how Farm Bureau advocacy helped improve the final law.
Farm Bureau worked hard to keep problematic policies out of the final bill. For example, a cash accounting proposal would have resulted in farmers having to use the accrual method, leading to a costly change that would have been difficult for many farms that receive payments after a crop year. Through our efforts, cash accounting will remain in effect, and will now be allowed for even more farms.
Another proposal, the Border Adjustability Tax, would have better aligned U.S. tax policy with most nations that apply a Value Added Tax to their imports, but the BAT could have had dire consequences on the overall economy by penalizing importers and increasing costs for farmers on certain inputs. After Farm Bureau and others expressed concerns, the BAT was removed from the final version of the law.
In addition, several useful provisions remain in the tax code because of Farm Bureau efforts. Those include retention of the Interest Charge-Domestic International Sales Corporation, or IC-DISC, a provision that has promoted exports for a growing number of agricultural producers. And Farm Bureau joined with cooperatives to secure a replacement to the Section 199 Domestic Production Activities Deduction.
The new law greatly improves a number of provisions, particularly the tax rate for individuals and corporations, increased business expensing and a less burdensome estate tax.
The number of tax brackets for individuals remains the same, but everyone will experience a reduction in tax rate. And for businesses structured as a C corporation, the rate drops from 35 percent to 21 percent. That said, only 2.3 percent of California farms are structured as a C Corp, which means the great majority receive income as a so called "pass-through" entity, taxed at the individual rate.
The new deduction for these pass-throughs, which are sole proprietorships, partnerships, LLCs and S Corps, allows 20 percent of pass-through income to be deducted, while the individual top rate would apply to the rest. The full deduction is allowed for up to $157,500 in individual income, or $315,000 if married. For those farmers above that amount, the deduction is limited to the greater of 50 percent of wages paid, or 25 percent of wages paid plus 2.5 percent of a business's depreciable property. This should help pass-throughs, but it will require maintaining a new depreciation schedule, keeping CPAs in business.
The estate tax exemption level has now doubled to $11 million per spouse, and stepped-up basis remains. Our years of advocacy against the estate tax haven't yet resulted in repeal, but this level will make the tax far less onerous for many family farmers and ranchers whose primary asset is the property they need to sustain their operation through the generations.
A huge win for agriculture in the new law comes from the doubling of business expensing to $1 million in equipment purchases, with a phase-out up to $2.5 million.
Our chief concern about the tax bill results from the erosion of the state and local tax deduction, especially given that California has among the highest state and local taxes in the nation. Though there is now a maximum $10,000 state and local tax, or SALT, deduction for individuals, many farmers exceed that amount. Farm Bureau advocacy ensured that they can, however, continue to deduct property taxes on Schedules C, E or F.
Other provisions of 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 for individuals, plus repeal of the Affordable Care Act individual mandate. We must also keep in mind that significant provisions expire in 2025, which a future president and Congress must address.
Everyone's business is different, which makes predicting the outcome for each farm very difficult. I strongly recommend you speak to a CPA early in the year about how the tax plan could affect your operation. It may be time to consider a new business structure, make business purchases or revisit your estate plan.
Tax law fundamentally influences behavior and can have a host of far-reaching consequences. I anticipate a follow-up bill will likely be considered in 2018 to address some of the new law's unforeseen impacts.
Don't hesitate to reach out to your county Farm Bureau to share what is working and what is not. Farm Bureau can take your story to Washington as part of our continued advocacy on your behalf.
The bill moved quickly through Congress, and we continue to analyze exactly how it will impact agriculture. The law is no less complicated than previous tax law, and it will take time to assess the pros and cons, learning how it might influence business decisions for our state's diverse commodities, farm sizes and regions.
We can offer preliminary assessments—and we can also report how Farm Bureau advocacy helped improve the final law.
Farm Bureau worked hard to keep problematic policies out of the final bill. For example, a cash accounting proposal would have resulted in farmers having to use the accrual method, leading to a costly change that would have been difficult for many farms that receive payments after a crop year. Through our efforts, cash accounting will remain in effect, and will now be allowed for even more farms.
Another proposal, the Border Adjustability Tax, would have better aligned U.S. tax policy with most nations that apply a Value Added Tax to their imports, but the BAT could have had dire consequences on the overall economy by penalizing importers and increasing costs for farmers on certain inputs. After Farm Bureau and others expressed concerns, the BAT was removed from the final version of the law.
In addition, several useful provisions remain in the tax code because of Farm Bureau efforts. Those include retention of the Interest Charge-Domestic International Sales Corporation, or IC-DISC, a provision that has promoted exports for a growing number of agricultural producers. And Farm Bureau joined with cooperatives to secure a replacement to the Section 199 Domestic Production Activities Deduction.
The new law greatly improves a number of provisions, particularly the tax rate for individuals and corporations, increased business expensing and a less burdensome estate tax.
The number of tax brackets for individuals remains the same, but everyone will experience a reduction in tax rate. And for businesses structured as a C corporation, the rate drops from 35 percent to 21 percent. That said, only 2.3 percent of California farms are structured as a C Corp, which means the great majority receive income as a so called "pass-through" entity, taxed at the individual rate.
The new deduction for these pass-throughs, which are sole proprietorships, partnerships, LLCs and S Corps, allows 20 percent of pass-through income to be deducted, while the individual top rate would apply to the rest. The full deduction is allowed for up to $157,500 in individual income, or $315,000 if married. For those farmers above that amount, the deduction is limited to the greater of 50 percent of wages paid, or 25 percent of wages paid plus 2.5 percent of a business's depreciable property. This should help pass-throughs, but it will require maintaining a new depreciation schedule, keeping CPAs in business.
The estate tax exemption level has now doubled to $11 million per spouse, and stepped-up basis remains. Our years of advocacy against the estate tax haven't yet resulted in repeal, but this level will make the tax far less onerous for many family farmers and ranchers whose primary asset is the property they need to sustain their operation through the generations.
A huge win for agriculture in the new law comes from the doubling of business expensing to $1 million in equipment purchases, with a phase-out up to $2.5 million.
Our chief concern about the tax bill results from the erosion of the state and local tax deduction, especially given that California has among the highest state and local taxes in the nation. Though there is now a maximum $10,000 state and local tax, or SALT, deduction for individuals, many farmers exceed that amount. Farm Bureau advocacy ensured that they can, however, continue to deduct property taxes on Schedules C, E or F.
Other provisions of 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 for individuals, plus repeal of the Affordable Care Act individual mandate. We must also keep in mind that significant provisions expire in 2025, which a future president and Congress must address.
Everyone's business is different, which makes predicting the outcome for each farm very difficult. I strongly recommend you speak to a CPA early in the year about how the tax plan could affect your operation. It may be time to consider a new business structure, make business purchases or revisit your estate plan.
Tax law fundamentally influences behavior and can have a host of far-reaching consequences. I anticipate a follow-up bill will likely be considered in 2018 to address some of the new law's unforeseen impacts.
Don't hesitate to reach out to your county Farm Bureau to share what is working and what is not. Farm Bureau can take your story to Washington as part of our continued advocacy on your behalf.
