Last week the House Ways and Means Committee released its long-awaited federal tax reform proposal. The proposal would change how farmers and ranchers are taxed both as individuals and as businesses. Many farmers and ranchers are wondering if property taxes paid on land, buildings, and equipment could still be expensed as business expense under the proposal. Yes-the ability to deduct property taxes as a business expense by farmers and ranchers on Schedule F would continue.
The changes made to the state and local taxes deduction only applies to itemized deductions claimed on Schedule A filed by individuals. The deduction for state income or sales taxes would no longer be allowed, but property taxes of up to $10,000 on the principal residence could be deducted. The limit would, however, apply to any property taxes deducted on a farm or ranch residence claimed on Schedule A. The average tax rate paid on residential property in Nebraska was roughly 2.0 percent in 2016. At that rate, the limit on property tax deductions would affect Nebraskans with homes valued at more than $500,000.
One of the bigger changes proposed under the plan affects “pass-through” entities like sole proprietorships, partnerships or S-corporations. Today, income from pass-through entities is reported on individual returns and taxed at individual rates. Under the proposal, such business entities could claim 30 percent of the pass-through income as a “return to investment” and be taxed at a maximum rate of 25 percent. The remaining 70 percent would be taxed at individual rates like today. It is unclear whether the 25 percent tax rate is a flat-rate, or if rates would phase-up until reaching that level. This provision could potentially reduce taxes on farm business income depending on where individuals fall in terms of brackets and rates. It has been suggested that nearly one-half of the farm and ranch operations in Nebraska could experience tax reductions with this provision.
A couple other provisions in the proposal are worth noting. First, the plan would allow businesses with less than $25 million in gross receipts to use cash accounting for tax purposes and deduct interest as a business expense. According to USDA data, only 0.40 percent of farms have gross receipts which exceed $25 million, so a large majority of farm and ranch operations would continue to be able to use cash accounting and deduct interest expenses. Second, the plan would double the exemption for estate taxes and eventually repeal the tax in 2024. At the same time, the plan would maintain the stepped-up basis for heirs.
The Ways and Means Committee is expected to mark up the bill yet this week and the full House will consider it shortly thereafter. The U.S. Senate will have its turn at the wheel as well. Stay tuned as Congress hopes to have a package passed by the end of the year.
Jay Rempe is the senior economist for Nebraska Farm Bureau. Rempe’s background in agricultural economics, years of experience in advocating at the state capitol, and firm grasp of issues allow him to quantify the fiscal impact of a regulatory proposal, and provide in-depth examination of key issues affecting Nebraska’s farmers and ranchers.