The Trump administration’s promise of tax reform has investors across the country wondering how their portfolios will be impacted should this plan make it through Congress. Given the deal is still in negotiation between the House, Senate, and Administration, it’s hard to nail down specifics. However, farmland owners and investors in agriculture can review the House of Representative’s recently-released Unified Framework for tax reform to better understand what these changes could mean to their investments.
New Tax Brackets
Before investing in a farm or ranch operation, it’s important to know the farm’s business structure to understand its tax consequences. More than 96% of farms in America – even very large ones – are family run. According to the U.S. Department of Agriculture National Agricultural Statistics Service's 2012 Census of Agriculture, 84% of farms surveyed were operated as sole proprietorships; 6.3% as partnerships, 5% as corporations, and 4.7% as Limited Liability Corporations. Generally farms, to include family-farms, with outside investors are going to fall into one of the last two categories.
The Framework’s proposed top tax rate for corporations is 20%, pass-through entities (PTEs) 25%, and individuals 35%. The PTE rate would likely be applied to most farms revenues, which include “the business income of small and family-owned businesses conducted as sole proprietorships, partnerships and S corporations.” In an attempt to prevent abuse of the PTE rate, “the committees [i.e., Ways and Means, and the Senate Finance Committee] will adopt measures to prevent the recharacterization of personal income into business income to prevent wealthy individuals from avoiding the top personal tax rate.”
Wealthy is yet undefined, though one would hope common sense prevails when applying this measure to growers who may own an expensive piece of land, but still be receiving a modest income from farming it.
Ending the Death Tax
The estate tax has long been a thorn in the side of succession planning for family farms. Currently, these taxes are charged to the heirs of individuals with an estate valued at $5,490,000 or more (effectively $10.98 million per married couple). Many family farms in America, especially those who have owned sizable pieces of land for generations, are impacted by the estate tax. With a significant investment in legal fees to establish complicated trusts or family partnerships, it’s possible for these farmers’ heirs to avoid this tax burden. The Framework proposes to eliminate the death tax. Some states, however, still maintain some variation of their own inheritance taxes.
The tax plan would double the standard tax deduction for individuals and eliminate most itemized deductions, which could impact farmers who are sole proprietors. Landowners have long enjoyed lower property tax rates than other real estate owners. Real estate property taxes on farm business assets are also currently deductible on a land owner's federal tax return. The Framework suggests that these deductions may be eliminated. Investors who own agricultural assets in a high tax state could have their returns impacted. Though there has been discussion of eliminating the mortgage interest deduction, conventional wisdom says that move would be so unpopular with homeowners and real estate (including agriculture) investors, that it will not happen.
Assuming at least some of the proposed tax cuts and reforms will be passed, agricultural investments will remain a favorable place to shelter wealth for the long term from taxes.
The information contained in this post is for educational purposes only and does not constitute tax advice. Please consult your tax professional before investing.