Federal Tax Saga Enters Next Chapter . . .

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The federal tax reform saga has turned a page and is moving into the next chapter in the U.S. Congress.  On the House side, the Ways and Means Committee advanced H.R. 1, the Tax Cuts and Jobs Act, to the House floor with a committee amendment.  The full House is expected to take up the bill later this week.  On the Senate side, Senate Republicans last week released a draft of a reform proposal which differs markedly in some provisions with the House plan.  The Senate plan will be taken up by Senate Finance Committee this week.

U.S. Capitol night2The Ways and Means Committee amendment . . . Perhaps the most significant change in H.R. 1 for farmers and rancher with the committee amendment concerns the treatment of pass-through income.  The initial draft of H.R. 1 created a 25 percent rate on a maximum of 30 percent of pass-through income.  The committee amendment instead creates a 9 percent rate, phased in over five years starting with 11 percent, on the first $75,000 in pass-through income for any person earning less than $150,000 in income from the business.  The 9 percent rate is phased up to 12 percent (the lowest rate for individuals under the proposal) for income levels above $75,000 and fully phased out at $225,000.  The committee amendment also clarifies farmland rental income would not be subject to self-employment taxes.

The Senate plan . . . For individual filers, the plan would maintain seven tax brackets and adjust the rates slightly.  It would repeal the deduction for state and local taxes, including property taxes, claimed by individual filers on Schedule A.  In tax year 2015, Nebraska individual filers claimed deductions of $145 million for state and local taxes-of this, $30 million was for real estate taxes; $1.2 million for sales taxes; and $109 million for state income taxes.  Itemized deductions for home mortgage interest for homes valued up to $1 million and medical expenses would be maintained.  The plan would also double the standard deduction and double the estate tax exemption.

The Senate plan . . . For businesses, the Senate plan lowers the corporate tax rate to 20 percent, but not until 2019.  The bill would also establish a 17.4 percent deduction for pass-through income based on the Section 199 domestic manufacturing deduction.  It is unclear how these proposed changes would affect farm and ranch taxes, particularly as the plan also repeals the Section 199 deduction.  More information is necessary to fully analyze potential impacts.  The Senate bill would allow equipment put in service before 2023 to be fully expensed, and expands the Sect. 179 business expensing to $1 million in property.  The present limit is $500,000.  And finally, cash accounting would continue for businesses with less than $25 million in gross receipts and businesses would be able to deduct state and local taxes paid by the business as an expense.

Both Houses of Congress have pledged to have legislation passed before the end of the year.  No doubt there will be several more page-turning chapters left in the federal tax reform saga.   Stay tuned for how the twists and turns could impact agriculture producers’ bottom lines.

 

Jay RempeJay 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.

Five Tips That Can Make Life Easier for Crop Insurance Claims.

Whether its rain, hail, or heavy winds, fall harvest has been rough in Nebraska. Tough weather can mean yield loss and reasons to look at whether losses are covered by your crop insurance.

“Just because you didn’t buy coverage for wind damage, your multi-peril insurance may have you covered depending on your situation,” says Farm Bureau Financial Services agent, Shannon Hannappel.

Hannappel says there are five things farmers should keep in mind if crop insurance claims are on your horizon.

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1. Communicate with your agent right away if you think you have experienced even a slight loss.

“There’s no need to wait. Getting connected with your agent even when you aren’t sure there’s a loss is always the best course of action,” says Hannappel.

2.  Keep good production records.

“If you’re commingling crops in your grain bins, make sure you can clearly identify what crops came from specific fields by marking your bins.

3. Keep irrigated and non-irrigated production yields separate when recording your production.

“At harvest, everyone wants to keep rolling, but taking the time to differentiate between irrigated and non-irrigated yields is important for your APH history and sometimes can determine if you get paid for a loss or not.” 

4. Report your production levels to your agent right away, even if you’re not sure if there’s a loss.

“Don’t wait till February to report production numbers. The sooner we can get the information the better to move a claim.”

5. Post-harvest, be sure to line up a year-end planning conversation with your agent.

“It’s always better if we have the opportunity to visit about what risks your concerned about for the upcoming growing season; especially if you’re looking to make some changes in your operation for the upcoming year, i.e. adding specialty crops or moving from traditional to an organic practice.”

 

 

Hannappel says the goal is to make sure you are protected in a way that meets your operation’s needs.

Property Taxes Can Still Be Expensed . . .

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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.

Wheat Field2One 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 RempeJay 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.

Forecast State Receipts Adjusted Downward . . .

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The Nebraska Economic Forecasting Board (NEFAB) on Oct. 27 adjusted its state revenue forecasts downward resulting in a budget shortfall of roughly $195 million for the current budget biennium.  NEFAB revenue forecasts are used by state senators to set the state spending.  Senators adopted a biennial budget earlier this year, but because they are required by the constitution to balance the budget, the decrease in forecast revenue means budget adjustments will be necessary during the 2018 legislative session in order to balance.

NEFAB revenue forecasts declined $100 million for the current fiscal year and $123 million for fiscal year 2018-19.  NEFAB projects revenues to grow, but at a slower rate than it forecast in April when it last met.  In April, it projected revenues to grow 5.6 percent in FY2017-18, and 5.4 percent in FY2018-19.  Most of the slowdown in revenues is due to lower individual income tax revenues.  Actual revenue growth averaged 0.3 percent over the last two fiscal years.  Historically, state tax revenues have grown at an average rate of 4.7 percent.  The chart below shows the state’s percentage revenue growth since 1982.  Note, the chart still reflects the NEFAB forecasts made in April.
tax receipts and budget

The state’s revenue growth is generally thought to be a good reflection of economic activity in the state.  The Legislative Fiscal Office said in its August budget report, “Beside inflation, this revenue growth over time reflects the ebb and flow of economic activity and economic cycles.  It reflects new businesses created and existing businesses that close.  It reflects new products and services added to the tax base and existing products and services that are eliminate or expire.  The key is the net impact.  The new or expanded businesses, products or services more than offsets those that decline or disappear.”  In looking at the chart, it’s easy to spot the economic downturns which have occurred in the past, 1986, 2002-03, and 2009-10.  The most recent decline in revenue growth, though, is different in that it has occurred while the state’s overall economy continues to grow.

So how does the latest NEFAB forecasts reflect on the Nebraska economy?  First, it’s probably reflective of the ongoing struggles in agriculture, which accounts for over one-fourth of the state’s gross domestic product.  While there are signs farm income may have hit a bottom, nobody is forecasting robust growth in near future for agriculture.  Second, it’s probably a reflection that the Nebraska’s economy is like the overall U.S. economy.  Economic growth is expected to continue, but at sluggish pace.  Thus, the projections of revenue growth greater than 5 percent like those made by NEFAB in April just isn’t in the cards.

 

Jay RempeJay 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.

SALT & Taxes . . .

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The Chairman of the House Ways and Means Committee, the tax writing committee of the House of Representatives, announced a draft of the federal tax reform bill will be released November 1.   Leaders in both the House and Senate have expressed hope a tax package could be passed by Thanksgiving.  One taxing concern on the minds of many farmers and ranchers is the fate of the deduction for state and local taxes (SALT).  The concern is especially acute in Nebraska given the large amount of property taxes paid by agriculture, roughly $1.3 billion in 2016.

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Under the unified framework for tax reform, the Trump Administration and Republican Congressional leaders said they want to simplify the federal tax code by repealing all itemized deductions, except deductions for home mortgage interest and charitable contributions.  Itemized deductions are claimed by individuals on Schedule A filed with Form 1040.  Most farmers and ranchers file taxes as individuals-the 2012 USDA Census of Agriculture showed 85 percent of Nebraska farms filed taxes as either an individual or family.  Additionally, only 28 percent of farmers and ranchers itemize deductions.  It is these operations who itemize deductions the loss of the ability to deduct state and local taxes could affect.  The average annual deduction for state and local taxes reported by farm sole proprietors on Schedule A for 2009-2015 (excluding 2013) was $128.4 million.  Presumably, the deduction is for state income taxes, property taxes on farm residences, and taxes on personal vehicles.  For these operations, the loss of the deduction could increase federal income taxes an estimated $18 million per year if not offset by other changes.

Corn harvest in Illinois - SeptemberFarmers and ranchers also deduct state and local taxes paid as a business expense for their operations, be it as sole proprietors, partnerships, or corporations.  It is here where most of the property taxes paid by agriculture on land and machinery are likely reported and losing the ability to expense state and local taxes would result in a significant increase in federal taxes.  Fortunately, according to the lobbyist for American Farm Bureau, the ability to expense state and local taxes as a business expense will continue.  Congressional leaders have indicated the repeal of the state and local taxes deduction would only apply on individual returns, and not affect the expensing of taxes by businesses.  But stay tuned, the reform discussions are now beginning in earnest, and no one can predict what might happen.

 

Jay RempeJay 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.

Talking Personal Property Taxes . . .

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Personal property taxes in Nebraska have garnered increased attention in recent weeks due to a paper released by the Platte Institute.  The paper examines the features of personal property taxes and discusses different means of reducing or eliminating the tax.  Taxes levied on personal property in Nebraska amounted to $217 million in 2016, or 5.6 percent of total property taxes levied that year.  Of the total, $56 million in taxes were levied on agricultural machinery and equipment, 26 percent of the total.  Personal property taxes amounted to 4.1 percent of total real and personal property taxes levied on agriculture.  Owners of commercial property paid the most personal property taxes in 2016, $114.6 million, equaling 53 percent of the total personal property taxes levied.

The graph below tracks personal property taxes levied since 2006 by sector:  agriculture; commercial; railroad; and public service companies.  Taxes on agricultural machinery hit a peak in 2014, totaling $64.5 million.  Since then, they have fallen 13 percent, no doubt due to reduced machinery purchases by producers.  Total personal property taxes levied grew over the period and peaked in 2015 at almost $221 million, before falling 1.7 percent in 2016.

Personal Property Tax by sector

Source: NE Dept. of Revenue Property Assessment Division, History of Valuation & Taxes Levied by Property Sector, 2006-2016, 12/21/16

Personal property taxes are assessed on a property’s net book value minus a depreciation factor, which is set in state law.  The depreciation factor increases as the property ages, and the taxes levied eventually phase out.  The first $10,000 of value for a property is exempt from taxation. General fund and special levies (i.e. bond levies) apply to personal as well as real property.

If personal property taxes were reduced or eliminated, the spending decisions made by local governments would be key in determining the amount of tax reductions which might result. Local governments could decide to reduce spending by the amount of taxes lost, and overall taxes collected would decrease.  Local governments could also decide to maintain spending levels and raise the levy rate to offset the loss in taxes.  Under this scenario, overall taxes would not decrease as taxes levied on real property owners would increase.  And to complicate matters further, state aid to schools would change also affecting the taxes levied.  Thus, while repealing taxes on personal property would eliminated a tax, it might not result in a reduction in taxes.

 

 

Jay RempeJay 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.

Latest Crop Production Estimates . . .

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This year’s Nebraska corn production is forecast to be 1 percent less than last year, and soybean production is forecast to be 1 percent more, according to the latest USDA- NASS estimates released on Thursday.  The latest estimates peg Nebraska corn production at 1.683 billion bushels and soybean production at 316.4 million bushels, a record for the state.  U.S. corn production is forecast at 14.3 billion bushels, down 6 percent from last year, while soybean production is forecast at a record 4.43 billion bushels, up 3 percent from last year.  The percentage changes in production for Nebraska crops are shown in Table 1.
Table 1. Percentage Change in Crop Production, 2016 to 2017

 Corn  -1 %
 Soybeans  +1 %
 Sorghum  – 19 %
 Dry Edible Beans  +49 %
 Sugar beets  +1 %
 Sunflowers  – 4 %
 Alfalfa Hay  + 4 %

Corn and soybeans together typically account for 90 percent of Nebraska’s total crop cash receipts.  As such, changes in revenues for these commodities, along with changes in beef sector revenue, will dictate the overall health of the state’s agricultural economy.  Calculations using the latest USDA production and price estimates suggest cash receipts received by corn and soybean producers could be less for this year’s crop.  Combined receipts for the two crops are estimated to decrease $389 million, or 4.48 percent from last year.  Revenue for the 2017 corn crop is estimated to be $325 million less, or 5.69 percent; revenue for the 2017 soybean crop will be $64 million less, or 2.16 percent less. The reduction in revenue would result in an estimated 0.61 percent reduction in net farm income, or $30.7 million, assuming corn and soybean receipts as a percentage of net farm income is the same as the average from 2008 to 2015.  The decline doesn’t necessarily mean total net farm income for the state will be down, as the beef feedlot sector has enjoyed positive returns for awhile this year.  But any positive returns in the beef industry or other commodity sectors must overcome the declines in corn and soybeans revenues to result in an uptick in income for the state.

 

Jay RempeJay 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.