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OCTOBER 27, 2017 ? VOL. 35 ? ISSUE 5 www.nefb.org

Tax Reform: What It Looks Like for Agriculture

America?s farmers and ranchers work in a world of uncertainty. There are no two days the same in agriculture. Whether it's unpredictable commodity and product markets or fluctuating input prices; from uncertain weather to insect or disease outbreaks, running a farm or ranch business is challenging under the best of circumstances. Farmers and ranchers need a tax code that recognizes their unique financial challenges. ?The current federal tax reform framework being discussed will affect farmers and ranchers both as individuals and businesses,? Jay Rempe, senior economist for Nebraska Farm Bureau said. ?The discussion is just beginning, and a lot of details need finalized, but agricultural producers need to monitor the discussions closely from both an individual and business perspective.? Individual Taxes Most farmers and ranchers file federal taxes as individuals and report business income on their individual returns. The 2012 USDA Census of Agriculture showed 85 percent of Nebraska farms filed taxes as either an individual or family. For individuals, the proposed framework would reduce the number of tax brackets from seven to three, reduce the top rate from 39.6 percent to 35 percent, increase the lowest rate from 10 to 12 percent, double the standard deduction, and repeal several itemized deductions. Most returns filed by farm sole proprietors claim the standard deduction, like most Nebraskans, so doubling the deduction might reduce taxes. ?The effective tax for Nebraska producers is about 14 percent. The impact of the proposed changes all boils down to what it means in effective taxes paid. Not knowing more about the plan, it?s tough to tell what it might mean for bottom line taxes paid,? Rempe said. Jennifer Jensen is an attorney with Endacott, Peetz & Timmer Law Firm in Omaha, Lincoln, and Newman Grove, Neb. The firm specializes in family succession and estate planning. Jensen is a member of Lancaster County Farm Bureau and is part of

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the graduating class of this year?s Leadership Academy. She is hearing a lot about the tax reform plan, but it is still too early to know what might happen. Reduces Corporate Tax Rate ?From a business perspective, the tax reform plan proposes a reduction in the corporate tax rate from 35 percent to 20 percent. The proposal for other business entities, such as S corporations, partnerships (and limited liability companies if they elect to be taxed as partnerships), and sole proprietorships, is somewhat different,? Jensen said. S corporations are corporations that elect to pass corporate income, losses, deductions, and credits through to their shareholders for federal tax purposes. Shareholders of S corporations report the flow-through of income and losses on their personal tax returns and are assessed tax at their individual income tax rates. This allows S corporations to avoid double taxation on the corporate income. ?Currently, business income from these entities ?passes through? to an individual's tax return and is taxed at that individual's rate. Under the tax reform plan, business income

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from these entities would not pass through to the individual business owner but rather would be taxed at a flat rate of 25 percent. The experts have pointed out the many complexities and potential pitfalls with this particular aspect of the plan. For example, under the proposed plan, business income from an LLC or S corporation would be taxed at the favorable 25 percent rate, and any income paid out to an owner as a wage would be taxed at the ordinary rate, which can reach as high as 39.6 percent under our current framework,? she said. Under the proposed plan, business owners could forego wages and opt instead for a greater business income allocation, saving 10 percent in income tax as well as payroll taxes. Given how many farmers and ranchers operate as S corporations, partnerships, LLCs, and sole proprietorships, they will want to pay particular attention to this aspect of tax reform, Jensen said. ?Another key item for farm and rancher businesses to monitor will be the deductibility of interest,? Rempe said. The proposal would limit the deductibility of interest for C-corporations, and says limitations on the interest deduction may be considered for other businesses. ?The ability to deduct interest, both mortgage and operating interest, as a business expense is important to farm businesses. The average annual mortgage interest deduction reported by farm sole proprietors on their Schedule F from 2009-2015 equaled $183 million. It?s not a small chunk of change.? Estate Taxes The proposal also seeks to eliminate federal estate taxes entirely. ?Farmers and ranchers are especially excited about a potential end to the estate tax. It seems that in this Congress we have a once-ina-generation opportunity to give farmers and ranchers what they have been pushing Congress to do, put an end to the death tax,? Jordan Dux, Nebraska Farm Bureau?s director of national affairs said. In the tax reform package, Farm Bureau is working to lower taxes on capital investments. Capital gains taxes should not be levied on transfers at death. ?Farm Bureau supports eliminating the capital gains tax. Until this is possible, the tax

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