2021 Agriculture Tax Highlights
Agriculture is an uncertain business. Product markets, fluctuating input prices, uncertain weather, insects and disease outbreaks makes running a farm business challenging. Farmers also borrow and invest large sums of money in capital assets like land and buildings in order to operate their businesses. As a result, farmers need a tax code that recognizes the financial challenges faced by agricultural producers. Farm Bureau believes that tax laws must protect, not harm, the family farms that grow America’s food and fiber.
Individuals, family partnerships and family corporations own over 99 percent of our nation’s more than two million farms. America values these family-owned farms because of the food, fiber and fuel they produce; the contribution that agriculture makes to job creation and the economy; and the open space that farming protects. Key provisions important to Farm Bureau are highlighted below.
Temporary Provisions of the Tax Cuts and Jobs Act
Many of the pass-through business provisions of the Tax Cuts and Jobs Act are temporary and should be made permanent. Since more than 98 percent of farms operate as pass-through businesses: sole proprietorships, partnerships and Sub S corporations, failure to extend important pass-through provisions will result in a tax increase for farmers and leave them without ways to deal with the cyclical and unpredictable nature of their businesses. Farm Bureau supports extending the following temporary provisions:
• Reduced Pass-Through Tax Rates and Expanded Brackets: If not extended, higher tax rates will increase taxes on the majority of farm businesses. (expires 2025)
• Unlimited Bonus Depreciation (Expensing): If not continued, farmers will be unable to offset income with deductions for their business expenses. This is especially critical because like-kind exchanges for equipment and livestock are repealed. (phase-out starts 2023)
• Increased Alternative Minimum Tax Threshold for Individuals: Rollback of the higher AMT threshold will cancel out important deductions and credits put in place by tax reform. (expires 2025)
Farm Bureau also supports extending the doubled estate tax exemption, and the Section 199A business income deduction provisions, which are explained in more detail below:
The Tax Cuts and Jobs Act, passed in 2017, temporarily doubled the estate tax exemption to $11 million per person indexed for inflation through 2025. In addition, the legislation preserves stepped-up basis and continues to allow the transfer of any unused exemption to a surviving spouse. This exemption level protects the vast majority of our nation’s farms from the devastating consequences of estate taxes, but a potential return to a $5.5 million per person exemption in 2026 is troublesome. Farm Bureau supports making the $11 million estate exemption permanent as a step toward the eventual repeal of estate taxes.
Without permanent repeal, instead of spending money to upgrade buildings, purchase equipment and further invest in the operation, farmers will have to continue to divert resources to pay for estate planning and life insurance. The value of family-owned farms is tied to illiquid assets such as land, buildings and equipment. With 92 percent of farm assets illiquid, producers have few options when it comes to generating cash to pay the estate tax. When estate taxes on an agricultural business exceed cash and other liquid assets, surviving family partners may be forced to sell land, buildings or equipment needed to keep their businesses running. This not only can cripple a farm, but also hurts the rural communities and businesses that agriculture supports.
Business Income Deduction (Section 199A)
The small business deduction (Section 199A) allows farms business operating as a sole-proprietorship, partnership or S-corporation to take a tax deduction of up to 20 percent of their qualified business income. For small farms with taxable income below $160,700 for individuals or $321,400 for joint filers (tax year 2019), this is a straightforward deduction and it is estimated that over 95 percent of taxpayers are below these income thresholds. Eligible businesses above these thresholds can still benefit if they are employee intensive or make capital expenditures.
With 98 percent of farms eligible for this deduction, the importance to agriculture cannot be overstated. This deduction provides farmers with improved cash flow, which is especially important as farmers recover from the economic downturn. However, this deduction expires after 2025, creating uncertainty and complicating long-term planning. Failure to extend this provision will result in a tax increase for farmers. Farm Bureau supports the Section 199A small business deduction becoming permanent law.
Additional Tax Issues
Section 1031 Like-Kind Exchanges
The capital gains tax and, in some cases, ordinary income tax on the sale of business property can be deferred if a farmer purchases replacement property. These transactions are called 1031 exchanges. When a farmer sells an asset, and does not acquire a replacement, they recognize a gain and pay the deferred tax. By using Section 1031, farmers exchange real property such as land or buildings. Farmers might use this tool to consolidate cropland closer to livestock barns, crop storage facilities, equipment sheds or the homestead where they live; to obtain more productive cropland or to mitigate environmental impacts; or reconfigure their businesses so that the next generation can join the business. Additionally, like- kind exchanges involving single purpose agricultural or horticultural structures are important for farmers wanting to replace or upgrade structures like greenhouses or buildings used to house animals.
Without this tool, some farmers would have to incur debt to continue their farm business, or delay essential improvements needed to maintain the financial viability of their farm. Farm Bureau supports allowing farmers to defer taxes when exchanging farm property for farm property (Section 1031 like-kind exchanges); increasing the time allowed to identify exchange property from 45 days to six months; and the time allowed to close and receive property from six months to one year.
Special Use Valuation
IRS Code 2032A Special Use Valuation allows property to be appraised as farmland rather than at development value when determining estate taxes at time of sale. The provision needs to be modernized to remove outdated limitations so that it can serve its intended purpose of helping to preserve family farm businesses. Farm families who choose to use Section 2032A Special Use Valuation commit to continue operating their farm business for 10 years. If they stop farming, sell the farm outside of the family, or change the use of their property, they must repay forgiven estate taxes. In addition, certain activities trigger an estate tax recapture. These include, but are not limited to, harvesting timber and selling a conservation easement.
Although Section 2032A Special Use Valuation holds great promise for protecting larger family-owned farms from estate taxes, it is not widely used due to its complexity which increases legal expenses. In addition, there is a $750,000 limit (indexed) in the amount that property values can be reduced. As a result, when Section 2032A Special Use Valuation is calculated, the resulting savings is insufficient to compensate for the restrictions put on the farm. Allowing more farm land to qualify for Special Use Valuation would elevate this provision of the tax code to its proper place as a helpful estate planning tool. Farm Bureau supports allowing inherited farmland to be valued at its agricultural value, rather than development value, without limitation under Section 2032A Special Use Valuation.
Valuation discounts adjusts asset values for estate tax purposes when a business is passed at death to multiple heirs. A reduction to the value of each person’s portion of the business is allowed to account for the lack of marketability and diminished control due to the fractional ownership structure. This helps farm families transfer agricultural operations to the next generation. If structured properly, courts have routinely validated discounts ranging from 10 to 40 percent, making valuation discounting a proven and effective strategy, and without it, higher estate taxes could lead to the liquidation of productive business assets needed to operate a farm or force the family farm to take on an unsustainable amount of debt. Farm Bureau supports allowing valuations for estate and gift tax purposes to reflect discounts for minority ownership and a lack of marketability.
Note: Capital gains taxes and stepped-up basis are covered on separate issue papers.
Farm Bureau requests support and cosponsorship of the below legislation related to the issues discussed above:
• H.R. 1381 and S. 480, the Main Street Tax Certainty Act, which would make the 199A business tax deduction permanent.
• H.R. 1712 and S. 617, the Death Tax Repeal Act of 2021, which would repeal the estate tax.
• H.R. 2370, the Preserving Family Farms Act of 2021, which would update IRS Code Section 2032A Special Use Valuation to allow more farmland to be valued at its agricultural value rather than its inflated development value for estate tax purposes.
• H.R. 2558 and S. 1166, the Accelerate Long-term Investment Growth Now Act (ALIGN Act), which would make full and immediate expensing provisions permanent.
Farm Bureau also requests support and cosponsorship of H.R. 2447, the Veterinary Medicine Loan Repayment Program Enhancement Act, which would reduce taxes for veterinary students who agree to serve in an underserved rural area.