Keep an eye out: Changes in Ag Tax Laws expected in Build Back Better bill

With ranchers, farmers and business people juggling the fallout of the pandemic, supply shortages, and increased costs, there’s one more ball that can be thrown into the circus scene: changes in federal taxes.

Some lawmakers have proposed several federal tax changes that would affect the ag industry and small businesses.

Some of them have been eliminated from previous versions of the Build Back Better Act, and some have not.

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Nothing is totally final till the President’s Build Back Better bill is passed, but the estate tax (often called the “death tax”) has been changed in the House’s version of the bill.

Currently, a person may transfer a total of $11.7 million through their estate tax-free; any amount above that is taxed by the federal government. This amount was raised in 2017 and was set to sunset in 2026, reverting the exemption level back to $5 million per person ($6 million, adjusted for inflation.)

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The new legislation changes the date from 2026 to January 1, 2022, with a forty percent tax on the amount over $5 million subject to federal taxes that must be paid within nine months of death.

Talking in millions of dollars sounds like it’s out of the realm of the average farmer or rancher, but estates can include the total value of a farm or ranch, which, when land and equipment are included, often meets or exceeds that amount. And with increasing land values due to the strong real estate market, it’s easy to get property values in the millions of dollars.

It’s hard to say at this point whether the estate tax date change will stay in the Build Back Better bill as it goes to the Senate, said Aaron Britt, Communications Director for Randy Feenstra, Representative for Iowa’s Fourth District and a Republican who serves on the House Committee on Agriculture.

The Build Back Better bill is now in front of the Senate, Britt said, who will conduct their own round of negotiations, and major changes are expected in it.

Ag representatives and senators have been able to stop the addition of the elimination of the stepped up basis.

When a person sells a piece of property, it is taxed on the amount it has increased in value since the purchase date.

The step-up basis works like this: when a person inherits a piece of property, it is taxed as if the inheritor bought the property the day the person giving it to them died; tax is paid only on the increase in value during the time they held the property. This step-up in basis reduces capital gains realized by the inheriting generation; if the step-up basis is eliminated or a tax on the basis is incurred, it will have a heavy impact on the transfers of farms and ranches to the next generation.

Another threatening ag tax isn’t, so far, included in the House’s version of the Build Back Better bill.

Like-kind exchanges are a tax-deferred transaction that allows for the selling of an asset and the purchasing of another similar asset, without generating a capital gains tax bill from the sale of the first asset.

Like-kind exchanges are also known as a 1031 Exchange, after Section 1031 in the U.S. tax code.

An example of a like-kind exchange might be when a farmer owns a piece of farmland, but finds a better piece that he or she would like to purchase. If he or he wants to buy the new piece, they can sell the original piece and use that money to invest in the better ground, deferring the capital gains and not being taxed on the difference until the second piece of property is sold.

Pres. Biden has proposed to cap like-kind exchanges at $500,000, meaning capital gains taxes would be assessed on the amount over $500,000.

Not only is the cap on the like-kind exchanges a problem, said Gary Wynne, legislative assistant to Rep. Feenstra, but high land prices make it even more threatening.

“That’s the problem we’re seeing now,” Wynne said, “with skyrocketing land prices. It doesn’t take much for a farmer to buy one property, reinvest and have quite a significant gain.”

The cap on like-kind exchanges was eliminated from legislation, but both Wynne and Britt say changes in ag tax laws will keep popping up.

“This will be an ongoing conversation,” Wynne said. “Between the like-kind exchanges and the step-up in basis, it seems like these are two things that are brought up to pay for spending priorities.”

There is still a chance that the step-up in basis and like-kind exchange tax changes might be included in the Build Back Better Act.

The Act has passed the House but is now in the Senate and will probably see major changes before it’s passed, using the reconciliation process, said Britt. The reconciliation process only requires a simple majority, 51 votes, instead of the usual sixty.

The Build Back Better Act is only one of several major bills the Senate needs to deal with, Britt said, before the Christmas holiday, including the debt ceiling and the National Defense Authorization Act, the annual military funding bill.

It’s good to stay on the lookout for any tax changes coming down the pike, Britt said.

“I would say, it’s definitely important not to take our eye off the ball here. There’s no guarantee (that tax increases) won’t be included. We’re still going to be watching it very closely. It’s definitely something to keep an eye out for,” he said.