President Trump won election partly on his promise of tax reform, boosting the prospects for the first comprehensive overhaul of the tax code in three decades. Witnesses at a House Agriculture Committee hearing said any reform package must retain benefits now available to farmers, such as deducting interest paid on loans and use of cash accounting to calculate income.
The largest U.S. farm group, the American Farm Bureau Federation, also endorsed repeal of the estate tax, a lower tax rate on capital gains when land or other property is sold, and retention of “stepped-up basis” for determining the value of property when it is inherited. Farm groups have campaigned for years to eliminate the estate tax. At present, there is a $5.49 million exemption before the tax is levied.
Farming often is a highly leveraged, ill-liquid business that offers modest returns, said Pat Wolff of the Farm Bureau, which supports lower overall tax rates. “What is needed are tax policies that support high-risk, high-input, capital-intensive businesses like farmers and ranchers that predominantly are sole proprietors and pass-through entities,” she said.
Leaders of the House Ways and Means Committee, which oversees tax law, have released a tax-reform outline that, among many revisions, would eliminate the tax deduction for interest payments, except to offset earned interest.
“As we know, ag operations are highly dependent on credit, both for their day-to-day operations and long-term expansion,” said Doug Claussen from the accounting firm KCoe Isom. “As such, most U.S. farm operations incur a substantial annual interest expense, yet are seldom structured to generate interest income to offset it.”
Farmers typically borrow money when they buy farmland, their greatest asset, so they often pay sizable amounts of interest each year, said Claussen. Ways and Means leaders say they will consider special provisions for the financial services industry to deal with interest expenses. “K-Coe Isom believes agriculture is as uniquely impacted as the financial services industry and supports special rules exempting it from this provision as well,” said Claussen.
Claussen and another tax expert, Christopher Hesse of CliftonLarsonAllen, said cash accounting is an important tool for farmers. There have been proposals in the past to bar use of the accounting method but the Ways and Means blueprint would leave it alone.
Cash accounting is the format used by most households in filling out tax returns. Revenue is tallied and expenses are deducted to arrive at income subject to taxes. Farmers have some control over both sides of the ledger; they can decide when to sell crops or livestock to generate revenue and when to buy items such as fertilizer or a tractor, which creates an expense that may reduce their taxable income.
Hesse likened cash accounting to an installment plan that allows farmers to “smooth” volatile income and expenses. Claussen said it was a “flexibility” tool, but not a tax avoidance technique.
The senior Democrat on the committee, Collin Peterson, said there was pushback in his Minnesota district against the Section 1031 tax provision that allows people to escape capital gains taxes if they make a “like kind” purchase. “It keeps land prices high,” said Peterson because Section 1031 allows non-farm investors to acquire cropland and crowd out farmers who are looking for land.
To read statements by witnesses, the opening statement of Chairman Conaway or to watch a video of the hearing, click here.