Lawmakers moved forward on federal tax reform after negotiators agreed to language in a conference report. Both the House and Senate are voted on the conference report this week. Many farmers and ranchers continue to ask whether property taxes paid on agricultural land, buildings, and equipment in their farm or ranch operations could still be deducted. Yes—the conference report does not change the ability to deduct property taxes as a business expense by farmers and ranchers on Schedule F, Schedule E, or Schedule C. The report does establish a $10,000 limit on the deduction for state and local income and property taxes, but the limit only applies to itemized deductions claimed on Schedule A filed by individual filers. Even though most farmers file income taxes as individuals, business income from a farm or ranch is reported on Schedule F, E, or C, where property taxes can still be deducted as a business expense.
Other tax provisions of interest to agriculture include:
- Doubles the standard deduction for individuals to $24,000 for joint filers; maintains seven tax brackets; adjusts tax rates; eliminates personal exemptions.
- Increases the Section 179, small business expensing, limit to $1 million and increases the level at which the deduction begins to phase out to $2.5 million. Indexes limits to inflation.
- Allows businesses to fully and immediately write off business investments through 2022. After 2022, provision is phased out until it is eliminated in 2027.
- Shortens the depreciation period for farm equipment and machinery to 5 years.
- Limits the interest deduction for businesses with more than $25 million of gross receipts.
- Reduces from five to two the number of years net operating losses can be carried back.
- Doubles the estate tax deduction to $11 million per individual and indexes the exemption for inflation. Provision sunsets Dec. 31, 2025.
- Continues stepped-up basis.
- Continues like-kind (1031) exchanges for real property, but eliminates it for equipment and livestock.
- Allows individuals operating pass-through businesses (sole proprietorships, partnerships, or Subchapter S), to deduct up to 20 percent of the income generated by a pass-through entity from taxation with some limitations. Provision sunsets Dec. 31, 2025.
- Reduces to zero the ACA tax penalty for individuals without health insurance.
Many farmers and ranchers should see reduced taxes under the provisions of the tax reform bill. Most farmers and ranchers file as individuals, and roughly 78 percent of farm filers currently claim the standard deduction. The doubling of the standard deduction, then, would reduce the income subject to taxation. However, the loss of the personal exemption would offset some of this benefit, especially if a filer has multiple children, but the doubling of the child tax credit could help. Excluding 20 percent of pass-through income, along with the equipment expensing provisions, would also reduce the amount of income subject to tax. Both could be helpful in helping producers cash flow their operations given the state of today’s agricultural economy. Finally, the doubling of the exempt amount for estate taxes would reduce the number of farmers and ranchers’ estates subject to the tax, and reduce the planning expenses for others. One negative in the plan, though, is many of the provisions are temporary due to sunset in 2025, meaning another debate in a few years over many of the same tax issues.
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 a firm grasp of issues allow him to quantify the fiscal impact of a regulatory proposal, and provide an in-depth examination of key issues affecting Nebraska’s farmers and ranchers.