The extensive tax reform proposal released yesterday by House Ways and Means Committee Chairman Dave Camp (R-Mich.) is "a strong and much-needed start to what will surely be an extensive tax reform discussion," according to American Farm Bureau Federation President Bob Stallman. "We look forward to continuing the conversation about meaningful tax reform that benefits the whole economy," he added.
Camp's proposal would lower both the top corporate income tax rate and the top individual tax rate to 25 percent, down from the current 35 percent for corporations and 39.6 percent for individuals. His plan would replace the current 10 percent and 15 percent tax brackets with a 10 percent bracket. The current 25 percent, 28 percent, 33 percent and 35 percent brackets would be swapped for a new 25 percent bracket.
The chairman's plan would also impose a surtax of 10 percent on the modified adjusted gross income of taxpayers making over $400,000 per individual or $450,000 per joint filers. This new 35 percent rate would replace the current 39.6 percent rate. The 10 percent surtax would not apply to income from qualified domestic manufacturing, which includes farm and ranch income.
"The chairman's proposal recognizes both the uncertain world farmers and ranchers operate in and agriculture's critical contribution to a strong American economy," said Pat Wolff, American Farm Bureau Federation tax specialist. "From extreme temperatures to floods and drought to fluctuating input and commodity prices, running a farm or ranch business is challenging under the best of circumstances. Allowing farmers and ranchers to hold onto a little extra cash in good years will keep them in business during the lean ones."
"And with more than 16 million jobs tied to agriculture through on-farm employment all the way to restaurant service, keeping farms and ranches going is good business for the whole country," Wolff added.
Under Camp's proposal, the current preferential 20 percent capital gains tax rate would be eliminated so that a portion of capital gains would be taxed at ordinary income tax rates. With 40 percent of capital gains excluded from taxation, only 60 percent of any capital gains are taxed at the taxpayer's income tax rate. For example, a person in the 35 percent income tax bracket would pay an effective 21 percent on capital gains.
The proposal would repeal the Alternative Minimum Tax, which Farm Bureau supports.
In addition, it would make no changes to cash accounting rules for farmers and ranchers. Farm Bureau is urging lawmakers to continue special cash accounting rules for farmers and ranchers that only require accrual accounting for C-corps with more than $25 million in gross receipts.
Also good news for agriculture, Camp would exclude businesses, including growers of perennials and plants for resale, with less than $10 million of average annual gross receipts from burdensome uniform capitalization (UNICAP) rules. Farm Bureau supports an exclusion for all plants.
Some of the provisions in Camp's proposal raised red flags with farmers and ranchers. The elimination or reduction of some key accounting methods and depreciation and expensing deductions could possibly offset the benefit of a lower income tax rate.
"It is not uncommon for farmers and ranchers to have years with little or no taxable income," Wolff noted. "So, a lower individual tax rate may not adequately compensate farmers for lost tax provisions and over time could result in a higher effective tax rate. That's something we'll be considering as we comb through this proposal."
Specifically, the plan calls for the repeal of three-year income averaging and the elimination of the allowance for certain types of property, including farm property, to be sold using the installment method.
The Section 179 small business expensing deduction limit would permanently be set at $250,000-half of what farmers and ranchers are calling for-with the deduction phased out when investments exceed $800,000. Farm Bureau supports reinstating the 2013 level of $500,000 with a $2 million phase-out level.
Also planned for repeal is the modified accelerated cost recovery system (MACRS), which would be replaced by a slower depreciation system. In addition, the five-year carry-back operating loss deduction for farmers and ranchers would be replaced by a two-year carry-back, as used by all other businesses.
The ability of farmers to immediately deduct soil and water conservation expenses, erosion prevention expenses and expenditures for endangered species recovery would be eliminated. Instead, these expenses would be capitalized in the basis of the property.
Farmers and ranchers would no longer be able to take an immediate deduction for expenditures for fertilizer, lime and other materials used to condition soil. The expenditures would instead have to be deducted over time. Farm Bureau supports the expensing of pre-production expenses.
Also repealed would be like-kind exchanges (commonly known as 1031 exchanges) that allow farmers to defer taxes when exchanging farm property for farm property.
Camp's plan would phase out the deduction for domestic production activities, reducing the deduction from 9 percent to 6 percent for 2015 and to 3 percent for 2016. The deduction would be repealed starting in 2017. (As explained above, however, domestic manufacturing income, which includes farm income, is excluded from the 10 percent income surtax.)
In addition, a provision that allows land owners to deduct up to $10,000 of reforestation expenditures instead of amortizing them over 7 years is slated for repeal.
A handful of lapsed tax credits for renewable energy, commonly known as "extenders," are also addressed in Camp's plan. The production tax credit for electricity produced from wind, closed-loop biomass, open-loop biomass, small irrigation power and other renewable sources would be reinstated but reduced to its base level of 1.5 cents per kilowatt-hour. It would be permanently repealed for projects starting in 2014. The biodiesel and renewable diesel tax credits would be scrapped.
On a positive note, Farm Bureau is pleased with the proposed six-cents-per-gallon increase to the current 20-cent excise tax on fuel to power commercial cargo vessels on inland or intra-coastal waterways to support the Inland Waterways Trust Fund. The increase will help fund construction and maintenance of the nation's locks and dams.