After years of negotiations and political horse-trading, Congress has finally passed a tax cut and reform bill. Unlike many previous tax bills that phased in over a longer period, most of this law goes into effect January 1, 2018. So what does the final bill mean to farmers and ranchers?
Over 94 percent of farms are organized as “pass-through” businesses. This means income from the farm is not taxed as a business, but rather on the owner’s personal tax returns. To prevent corporations from getting an unfair advantage over pass-throughs, the new law allows pass-through businesses to take a deduction equal to 20 percent of business income. This should be a significant benefit to the vast majority of Missouri farms and ranches.
One of the less-discussed items that will affect farming and ranching operations is a change to the Section 1031 Like-Kind Exchange rules. Currently when a farmer sells land, equipment or livestock, they can defer any capital gains taxes if they purchase replacement property of a “like kind.” This allows farms to essentially trade one piece of property for another without triggering a tax payment.
The new law continues to allow such exchanges for real estate and buildings but eliminates it for other kinds of property. This could pose some problems for breeding stock or some equipment, but most other such items do not appreciate in value and therefore will not be affected. There had been some discussion of eliminating 1031 exchanges all together, which would have had devastating effects on the farm real estate market, but this final compromise will cause much less disruption to farming operations.
Some of the effects of this change may be offset by an increase in the ability to write off the cost of new and used machinery, equipment and livestock under the Section 179 Small Business Expensing provision. The new law doubles the current deduction to a $1 million cap and indexes it for inflation. Rules for immediate expensing are also expanded and will now allow full and immediate expensing of business investments, also known as “bonus depreciation.”
In farming circles, perhaps the most welcome news is the dramatic reform of the Estate Tax, often called the “death tax.” The first $11 million of an individual’s estate (and the first $22 million of a couple’s estate) will now be exempt from the Estate Tax, indexed to rise with inflation over the next eight years. At the end of 2025, this provision expires and the law reverts back to current law. While a permanent change would have been preferable to help families plan ahead with more certainty, this provision makes an enormous difference in the number of family farms that will be impacted over the next eight years.