Will Farmers See Top 15% Tax Rate Under Tax Reform

President Trump is in the process of releasing his plans for tax reform over the next few days.  We have heard his plan is to tax all business income whether in the form of a corporation or a pass-through entity at a top rate of 15%, down from the current top rate of 39.6% for individuals and 35% for corporations.

If this happens, farmers would then likely see a top tax rate of 15%.  However, the devil is in the details and we have not seen those yet and may not see them for several months.  Some of the details I would worry about are the following:

  • This top rate applies to business income.  Over the years, farmers have set up many entities to separate their land holdings from the business.  Part of this was for liability and ease of transfer purposes, but much of these entities were set up to reduce self-employment tax.  The income from these entities under the tax proposal would be subject to the top rate (whatever it might be).  It likely would not qualify for the lower rate.
  • There is a good chance that the top tax rate could be 15-20% on pass-through entities, but it is likely that Congress may implement the application of some percentage of income automatically subject to self-employment/payroll taxes.  A 70/30 split has already been discussed.  This means all of your income including wages paid to you would be calculated and the self-employment/payroll taxes would be applied to 70% of this income and 30% would be exempt.  This would increase the tax rate to about 30% on net farm income under the $125-200,000 level and then the amount above that could be a few percentage points higher.  We have posted on this in the past.
  • There will likely be restrictions in place to prevent normal “wage” income being converted to business income.  We don’t know what these restrictions are, but they could be material.

As you can see, a top rate of 15% sounds great, however, many farmers could actually see their tax burden go up dramatically if some of the above “details” happen.  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 principal 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. Leave a comment for Paul. If you would like to leave a comment for Paul, follow the link above, however, please make sure to include your email address so that he can reply to your comment (your email address will not automatically show up).

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