Minding Ag's Business
Marcia Zarley Taylor DTN Executive Editor

Thursday 02/27/14

Tax Reform Not Simple

House Ways and Means Chairman David Camp's tax reform plan released this week makes for good political theater but offers such a radical shift of today's tax code, few Washington insiders believe it can make headway in its current form this year. Still, ag interests may not want to take any chances in 2015.

"The thing that leads me to believe something may happen is that both the Democrat-controlled Senate and the Republican-controlled House are bringing up the same points," said Paul Neiffer a CPA and principal in the agriculture group at CliftonLarsonAllen LLP in Yakima, Wash. "They've reached beyond the smoke stage and there's a little fire behind this."

Tax leaders in both chambers of Congress are serious about lowering U.S. corporate tax rates to keep profits from international firms like Apple from flowing overseas, he added. "The only way to do that is to chop here and there," Neiffer said. "Those that will pay for those corporate cuts are individuals and farmers."

Just the summary of the chairman's proposal runs over 200 pages and technical language 979 pages. Kyle Pomerleau and Andrew Lundeen, writing for the Tax Foundation, note while Camp's plan maintains revenue neutrality, "on first blush it appears to do little by way of addressing the complexity of the tax code, and in some ways, makes the tax code more complex."

Among the most significant items in Camp's tax volley:

--Individuals would have three tax brackets--10%, 25% and 35%. But almost all farm income--whether through a Schedule F or pass-through entity--would qualify for maximum of 25% tax rate.

--Maximum corporate tax rate would be reduced to 25% over five years.

--Income averaging would end, terminating a tool that allows commodity producers to even out the boom-bust cycles in agriculture.

--Like-kind 1031 exchanges would be repealed, making trades of farm real estate taxable events. Likewise, trading farm equipment would become more costly.

--Accelerated depreciation would be eliminated. All assets would be depreciated over their useful life on a straight-line basis. For example, Neiffer says trees and vines would be depreciated over 20 years instead of 10. Almost all farm real estate, including specialty buildings, would be depreciated over 40 years and not the current 10 or 20. Seven-year property would become 12-year property.

--A permanent Section 179 writeoff for capital purchases at $250,000 would help some, compared to the $25,000 in effect for 2014. But many bigger growers spend $500,000 to $2 million annually on new investments, Neiffer said, so commercial farms will be constrained.

--Taxpayers who materially participate in an S corporation or partnership would be required to automatically treat 70% of their earnings from the business as subject to self-employment tax. Currently, some taxpayers take small salaries and pay large dividends to avoid the self-employment tax.

--Firms with gross sales in excess of $10 million would be required to use accrual instead of cash accounting, but in a victory for agriculture, farming would be specifically excluded. Last week, a study by Informa Economics found that rule would have hiked ag producers' tax bill by $4.8 billion but left them with only $1.2 billion to pay the tab.

By ending agricultural sacred cows such as 1031-like-kind exchanges, Chairman Camp has raised the threat to an "alarmingly high level," said David Brown, president of IPE 1031, a Des Moines, Iowa based intermediary who specializes in like-kind real estate transactions. "Uniformly, farmers and ranchers use 1031 to acquire higher grade parcels, consolidate tracts, move tracts closer to home, etc." he said. Losing that option "would eliminate their ability to exchange out of ag assets into non-ag assets to diversify or retire with a different type of real property asset. I'm seeing more farmers than ever going into commercial assets given farm values appear to be at their peak for now."

Lobbyists for the National Association of REALTORS, say it is taking the proposed repeal of 1031 exchanges seriously and urging its continuation. It sent letters to all members of the U.S. House this week, reiterating that "when an investor in real estate exchanges one property for another of like kind, economically, nothing has changed. Indeed, allowing capital to flow more freely among investments is critical to economic growth and job creation."

Neiffer thinks its early enough in the debate to influence the outcome, and thinks it's worth being watchful. "Since this is a mid-term election year, it has little chance of passing, but it is important to note possible changes that Congress is pondering," said Neiffer. "Many of these proposals are similar to the Senate or President Obama's tax reform initiatives and there is a good chance that tax reform will occur over the next few years, but who knows that the final bill will be."

To read Neiffer's blog on the topic go to www.farmcpatoday.com

To read the summary of the House Ways and Means Committee chairman's proposal go to http://waysandmeans.house.gov/…

Follow me on Twitter@MarciaZTaylor

Posted at 2:11PM CST 02/27/14 by Marcia Zarley Taylor
Comments (3)
Tax reform is immaterial when governments are trying to spend their way out of debt.
Posted by Bonnie Dukowitz at 6:34AM CST 02/28/14
We need to move to a consumption tax and trash the entire tax code as it exists. Provide a credit to pay no tax at all on spending up to the poverty line and tax all consumption of goods & services after that. No income taxes personal or corporate, no capital gains taxes, no entities to create to play the tax games, no K-1's, no payroll tax, no deductions or credits, and when you die no estate taxes - get rid of it all. It would be a high rate of tax on what you buy, but think about how simple it would be compared to what we have now, and you only pay tax when you can afford to spend. Huge incentive to save or invest in things that create jobs rather than just spend until you're broke. There would be a lot of attorneys with nothing to do, but everyone would be able to plan their future knowing exactly what they will pay tax on and when. Politicians wouldn't like it as they will have no "goodies" like tax credits, write-off's, etc to reward their supporters with, so it would be a tough sell in Congress, but it's the "fairest" tax plan possible in my opinion.
Posted by Gary Hoots at 7:47AM CST 02/28/14
Gary, I agree in principle with a consumption tax, but guarantee that within a year or two some sort of income based tax would be re-instituted. Is there a politician in either party that could be trusted to keep their hands off of somebody else's money? I can hear the argument now that we need to do this because of needed investments in infrastructure, schools, fairness, veterans benefits, etc. No politician can be trusted to keep their hands off somebody else's money, least of all the slimy characters we keep electing on the basis that they bring home the bacon to our state, district etc. We would end up like Canada and most of Europe that has Value Added Tax and Income Tax.
Posted by David Kessler at 9:57AM CST 03/04/14
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