Tax proposals could affect ag producers
March 28, 2014
Hold on to your hats, cowboys! The United States House and Senate committees are both proposing tax changes, many of which will directly and negatively affect agriculture producers.
A Washington state tax consultant originally from Selby, S.D., believes "small" (less than $10 million in gross receipts) ag producers should pay special attention to two issues. "For smaller rancher operations, a few thousand cows and less, key components are the potential of capital gains on sale of livestock and stretching out depreciable lives on assets." stated Paul Neiffer, tax consultant with CliftonLarsonAllen and also the author of the blog The Farm CPA. This was Paul's response when asked what he sees as the biggest potential tax concern for small One of the bigger potential tax concerns for those with more than $10 million in gross receipts is the potential "change in the cash method of accounting."
Neiffer also said that the senate proposal eliminates the favorable regulations many ranchers utilize regarding capital gains. Currently, the sale of purchased livestock poses capital gain risk based on the purchase price. Sale of purchased livestock is treated as ordinary income to the extent of depreciation claimed in previous years. If livestock (over 2-years-old) is raised, it qualifies for capital gain treatment.
These aren't all the potential changes in store. "It is obvious they want to stretch out depreciable lives so for livestock producers that have been able to depreciate something over 7-years it will probably now be over 12 years, " says Neiffer. This would be a change for many agriculture producers, especially those who often use accelerated depreciation.
Also at stake are 1031 exchanges. A Forbes.Com article discusses this proposal. The article, "7 Key Rules About 1031 Exchanges – Before They're Repealed" explains that a 1031 exchange is "A swap of one business or investment asset for another."
Proposals from both the house and the senate "want to eliminate like-kind exchanges, for both machinery and land," stated Neiffer. Currently, if done correctly, taxes can be avoided until certain assets are actually sold for cash. However, if 1031 exchanges are repealed, you wouldn't be able to swap these assets without tax consequences. In addition, under the house proposal, individuals would also now owe tax on the trade-in value of machinery.
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More changes affecting agriculture proposed in the Tax Reform Act of 2014 by the Committee on Ways and Means are discussed in Section #3115, which is "Repeal of deduction for expenditures by farmers for fertilizer, etc."
The way the tax laws currently stand, an agriculture producer can choose to "deduct immediately expenditures for fertilizer, lime, ground limestone, marl, or other materials to enrich, neutralize, or condition land used in farming," as discussed in the Tax Reform Act. The Committee on Ways and Means are proposing to repeal this act, which according to their calculations, "would increase revenues by $3.4 billion over 2014-2023." This $3.4 billion will come straight out of the pockets of producers.
To top things off, in an article written for the February 2014 "Top Producer," magazine, Mr. Neiffer discusses that an additional tax reform proposal "might make it tougher for farmers to select the right entity to own farmland." The way the current laws are written, if an LLC or partnership owns real estate, it is "easy to transfer land into and out of the entity without incurring tax."
Richard Pluimer, an attorney at Brady Pluimer, P.C. in Spearfish, S.D., said that "LLCs and Corporations are good vehicles to limit liability and protect personal assets." This is one of the reasons that businesses choose to form a limited liability company or a corporation. While transferring the land into and out of the LLC or partnership may be relatively painless as discussed above, transferring land into a corporation may remain easy, but getting it back out is where the 'ouch' starts.
"When land is distributed from a corporation, it's treated as if it were sold at fair market value. This causes the shareholder to pay tax, even though no cash was received," explained Mr. Neiffer in the Top Producer article. The potential upcoming problem with the new tax proposals is, as explained by Mr. Neiffer, that "One proposal calls for partnerships and LLCs to be taxed the same as corporations when it comes to land ownerhip." Simply put, this would mean that the easy transfer of land out of an LLC would be a thing of the past.
At this point, all these changes are still only proposals. However, if the proposals are passed by the house and senate, there will be some very significant changes and tax consequences for agriculture producers. Many of these changes are being proposed by both legislative houses; they are essentially on the same page. Now would be the time to let your legislators know how you feel about the tax proposals and what kind of effect they will have on your operation.