Still Not Much is Known About Tax Reform

Today the “Big Six” released additional details on their tax reform guidance.  Much of the release is simply a rehash of what we already knew or surmised would be in the release.  Here are the most important details for farmers:

  • Expensing of all equipment purchases would be allowed for at least 5 years.  This is a super Section 179 deduction, but might expire after five years.
  • A reduction in the corporate tax rate down to 20%.  There is no mention if the 15% tax bracket on the first $50,000 of income would remain.  There may also be some type of dividends paid deduction to reduce the burden of double taxation.
  • The flow-through rate for farm income would be capped at 25%.  However, there is mention of making sure that some portion of this income is considered “employment income”.  This likely means that all farm flow-through income may be put into a bucket (possibly including all self-rental income) and allocated to income subject to both self-employment (payroll tax) and regular tax rates, with the remainder being taxed at 25%.  The percentage that we have seen is around 70% for the higher rate income and SE tax amount.  But we don’t know any details yet.
  • The business interest expense deduction for C corporations will be partially limited, but no details.
  • An almost doubling of the standard deduction to $12,000 for singles and $24,000 for married couples.  This sounds nice, however, they eliminate the personal exemptions which means for a single person, you have an additional deduction of only about $1,500 and for married couples the extra deduction might be about $3,000.
  • The child tax credit would be increased, but we don’t know by how much.  There would be a $500 credit for other dependents.
  • Tax brackets would be 12%, 25% and 35%.  There is also room to add a fourth bracket for higher income taxpayers (such as the “Buffet” bracket).
  • There is no mention of what the capital gains tax rate would be.
  • They mention that a more accurate definition of inflation would be used.  When I hear those terms, I am afraid this might mean that the rate of inflation will go down from current calculations.
  • Alternative Minimum Tax is repealed for individuals and likely for corporations.
  • Only home mortgage interest and charitable contributions will remain as itemized deductions.  However, no specifics on whether there will be a reduction in these calculations is in the release.
  • They highlight making it easier for people to plan for retirement, but nothing regarding whether they want to Rothify 401k plans as we have previously discussed.  If tax offsets are needed for reducing tax rates, this may be the area to pull that from.
  • They say they will eliminate the estate tax, but nothing on keeping step-up in basis.
  • Nothing on keeping or eliminating Section 1031 exchanges.

All-in-all, this is almost a carbon copy of the House Republican plan from more than a year ago without the border adjustment tax.  This will now go to committees in the House and Senate and will be tweaked and/or may never happen.

From what I see in tone of the release is that most farmers may get a reduction in tax rates and more aggressive Section 179 deduction, however, this may be offset by an increase in self-employment/payroll taxes, a loss of state income tax deductions and other itemized deductions and perhaps no Section 1031 relief on sale of land and buildings.

We will keep you posted.

  • Principal
  • CliftonLarsonAllen
  • Yakima, Washington
  • 509-823-2920

Paul Neiffer is a certified public accountant and business advisor specializing in income taxation, accounting services, and succession planning for farmers and agribusiness processors. Paul is a partner with CliftonLarsonAllen in Yakima, Washington, as well as a regular speaker at national conferences and contributor at agweb.com. Raised on a farm in central Washington, he has been immersed in the ag industry his entire life, including the last 30 years professionally. In fact, Paul drives combine each summer for his cousins and that is what he considers a vacation.

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Comments

Very well stated, Paul!

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