Will Cash Rent Landlords Switch to Crop-Share
Farmland rental arrangements over the years have migrated from the typical crop-share leases to cash rent leases. The main reason for this switch was the cash rent “guarantee” and likely not having to deal with selling the crop.
However, with the new tax bill, there may be a switch by some landlords from cash to crop-share to take advantage of the new Section 199A co-op deduction. Sales to a non-cooperative require a trade or business to qualify for the regular Section 199A deduction. Sales to cooperative do not require a trade or business, therefore, crop-share landlords will also qualify for the Section 199A co-op deduction (at least based on reading the Code). A farmer who pays cash rent is entitled to the full 20% Section 199A deduction on selling the crop to the cooperative. However, if he farms it on a crop-share arrangement, the farmer is entitled to its share and the landlord is entitled to their share assuming they both sell to a cooperative. For a farmer and a landlord in a higher tax bracket, this can result in potential tax savings being transferred from the farmer to the landlord.
We worked up a chart showing what this might look like for good farmland in the Midwest. We assumed that the farmer and the landlord would net the exact same amount in either scenario; the only difference was how much each party received for the Section 199A deduction. Here is the table:
Line 1 shows total revenue for both the farmer and landlord.
Line 2 shows the expenses needed to get “net income” to equalize.
Line 3 are the property taxes for the landlord.
Line 4 is the net income. As you can see the “net income” is the same for the farmer and landlord under each option.
Line 5 shows the co-op Section 199A deduction allowed for the farmer and the landlord. With a cash rental, the farmer gets all of the deduction and the landlord gets none. Under a 50/50 crop-share, they each get the same amount.
Line 6 shows the tax benefit assuming a 35% tax bracket for both.
Line 7 shows the net after-tax income for each option (we ignored the income tax on the net income on line 4). The farmer’s net income drops by about $32 to the landlord ($1 difference due to rounding).
This is a potential benefit based upon the reading the Code that was put into law. Landlords that are interested in maximizing their after-tax return and are willing to accept the price risk may be interested in switching to a crop-share arrangement. Other landlords, especially those in a lower tax bracket likely will not make the switch.
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 Walla Walla, 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. Paul and his wife purchase an 180 acre ranch in 2016 and enjoy keeping it full of animals.
Paul, I thought receiving farm rents is qualifying income for the 20% deduction?? The landlord receiving rents only ,does not qualify for the 20%? Self-rentals might qualify? Tim