Archives: Issues

Interest Deductions

We all know what it is like to be in debt. But student loans and car payments are a drop in the bucket for agricultural producers, who are heavily reliant on credit to finance their capital-intensive operations. Interest deductions keeps the cost of credit down. Without it, the majority of family-owned livestock operations would be hard-pressed to survive.

Interest deductions allow a taxpayer to deduct the cost of interest paid on debt from their tax bill. The provision allows U.S. beef producers to access credit, such as operating and inventory loans, at a lower cost. Of course we all want lower costs, but why is this critical for farmers and ranchers?

For starters, access to credit and loans enable everyday management of the business. In some instances, debt financing of this nature is the only way to survive a bout of low commodity prices and stay viable over the long term. In a weak farm economy where income is limited and uncertain, producers are often forced to take on substantial annual interest expense to stay afloat. During these trying times, farmers and ranchers need all the help they can get – not a higher tax burden.

Debt financing is also critically important for the next generation of agricultural producers. Less than two percent of the US population is directly employed in agriculture. Consistent with a thirty-year trend, the average age of a principal farm operator is 58, making farmers and ranchers among the oldest workers in the nation. As older producers exit the workforce, financing will crucial for new and beginning farmers and ranchers looking to establish businesses.

The Bottom Line:

NCBA opposes any reforms to the tax code which would create new barriers for the next generation of agricultural producers, any proposal to eliminate interest deductions for agricultural entities.

Why it Matters

  • Subject to volatile commodity markets and uncertain incomes, farmers and ranchers must rely on interest deductions to stay viable over the long term
  • Debt financing helps new and beginning farmers and ranchers looking to start a business

Like-Kind Exchanges (IRC Section 1031)

Consumers are familiar with a simple question when making a transaction: cash or credit? For farmers and ranchers operating their business, there are different options on the table. One option, called like-kind exchanges, serves as a valuable tool for running an efficient, productive agricultural business.

IRC Section 1031 allows farmers and ranchers to defer taxes when they sell assets and purchase replacement property of a like-kind, whether that be land and buildings, equipment, or breeding and production livestock. Since 1921, these types of exchanges have played a critical role in helping family farmers and ranchers fend off encroachment from commercial and residential entities. However, as demand for agricultural real estate continues to increase, acquiring real estate to fulfill like-kind exchanges is becoming more difficult. IRC section 1031 g (1) could be improved by eliminating restrictive, draconian rules and allowing farm and ranch families more time to complete these transactions more efficiently.

The Bottom Line:

NCBA supports reforms to the current IRC section 1031 that would align generally with the following:

“A taxpayer selling farm, ranch, or other agricultural production property shall have 180 days (rather than the current 45 day limit) to identify a maximum of six replacement properties (rather than the current num-ber of three) regardless of value to be received in exchange as “like kind” after the date on which the taxpayer transfers the relinquished property in the exchange, and such property is received not more than 365 days (rather than the current 180 day limit) after the date on which the taxpayer transfers the property relinquished in the exchange, regardless of the taxable year in which the transfer of the relinquished property occurs.”

Example 1, Generational integration:

Rancher Bob wants to buy more land to integrate his Son Tim into the operation. Utilization of a 1031 exchange can preserve extra capital for land purchases by decreasing tax liability. Rancher Bob sells, through a qualified intermediary, Tract A to his Son Tim for $320,000.

 

Tract A

  • 80 acres cropland, plus house, barn, and machine shed.
  • Originally purchased in 1979 for $100,000.
  • Fair Market Value (FMV) is $320,000.

Rancher Bob purchases Tract B, using a qualified intermediary.

 

Tract B

  • 160 acres pasture.
  • FMV is $320,000.

Rancher Bob’s basis in Tract B is now $100,000, transferred from Tract A.

 

Example 2, Urban Sprawl:

Farmer John owns Tract A near a city where it is becoming difficult and dangerous to maneuver equipment through suburban streets.

 

Tract A

  • 100 acres farmland.
  • FMV of $2 million.
  • Purchased in 1980 for $100,000.

Developer Dan owns Tract B outside the city sphere and would prefer to own land more readily available to build homes.

Tract B

  • 500 acres of farmland.
  • FMV $2 million.
  • Purchased in 1980 for $500,000.

Developer Dan and Farmer John use a 1031 like-kind exchange to trade properties, with each not realizing any gain and trading basis on the properties.

  • Tract A is now owned by Developer Dan with a basis of $500,000.
  • Tract B is now owned by Farmer John with a basis of $100,000.
  • Farmer John continues to farm and the Developer Dan has a ready-to-build development location.
  • Developer Dan has more money to invest in his development.
  • Farmer John continues to grow his operation and generate additional income, rather than Farmer John simply cashing out and exiting the industry.

Immediate Expensing

Today’s modern, efficient food supply provides consumers with competitive prices for beef at the grocery store. It is out of sight for most consumers, but built into the price tag for the New York Strip in the meat aisle is a wide array of production costs. Immediate expensing is one way to help agricultural producers manage these costs, and incentive further investment in businesses and employees.

Immediate expensing allows farmers and ranchers to accelerate their cost recovery of investments in their business. Equipment, fertilizer and soil conditioners, environmental conservation expenditures, and the cost of raising and breeding cattle are major capital investments. Without them, farmers and ranchers would not be able to sustain and grow their business.

The Bottom Line:

Given the capital intensity of agriculture, NCBA supports proposals to allow for the immediate expensing of capital purchases, which would be used extensively by U.S. livestock producers.

 

Cash Accounting

If you think Turbo Tax is hard to understand, try navigating the modern tax code as an agricultural business. For farmers and ranchers, uncertain income, volatile commodity markets, and even weather conditions can throw a wrench into the best laid plans. Luckily, the use of cash accounting provides small agricultural businesses with the flexibility they need to effectively manage their tax burden.

Under a cash accounting system, revenue is recorded when cash is actually received from customers, and expenses are recorded when cash is paid to suppliers. Previous tax reform proposals eliminated cash basis accounting for all entities, including farmers with annual gross revenues in excess of $10 million. Loss of cash accounting could create a situation where a farmer or rancher would have to pay taxes on income before receiving payment for sold commodities. This would have had devastating impacts on affected farmers and livestock producers. Not only would paying the tax become difficult; cash flow problems could necessitate a loan to cover ongoing expenses until payment is received. The use of cash accounting helps to mitigate this challenge by allowing farm business owners to make tax payments after they receive payment for their commodities.

The Bottom Line:

NCBA supports the continuation of cash accounting to give ranchers the flexibility they need to manage taxes effectively.

Why it Matters

  • Volatile commodity markets make accrual accounting difficult to manage for small businesses and family farms
  • Cash accounting helps mitigate cash flow challenges that are a feature of agricultural production

 

Stepped-up Basis

Many of America’s ranching families have been working their land for generations, and hope that their children and grandchildren will carry on the tradition. Tax policies like stepped-up basis help make their dreams a reality.

Stepped-up basis moves the base value for assessing taxes on a deceased family members’ property up to the fair market value at time of death. If Congress is serious about protecting family farms and ranches, they should recognize the unique needs of agricultural producers and keep this critical provision. Assets in agriculture are typically held by one owner for several decades. Resetting the base value of the land, equipment and livestock on the date of the owner’s death (i.e., using a step-up in basis) is critical for surviving family members who hope to keep the operation intact. Discontinuing this practice has the potential to create massive tax liability for the heirs when they ultimately upgrade or transfer these assets as part of their business operations.

The Bottom Line:

While comprehensive tax reform has the potential to deliver significant benefits to our nation’s farmers and ranchers, it is equally important that legislation preserves important provisions which support family-owned operations. NCBA supports reducing taxes for the next generation of cattle producers by maintaining stepped-up basis.

Why it Matters

  • Stepped-up basis helps keep family ranches intact and supports the next generation of ranchers
  • Removing stepped-up basis would cause massive tax liabilities for family-owned farms and ranches, damaging the economic vibrancy of rural communities

The Death Tax

Talk to most people about the impacts of the Death Tax, and images of jet-setting billionaires and wealthy business moguls will likely come to mind. But in its present form, the Death Tax (also known as the federal estate tax) preys on a forgotten victim: family-owned ranches.

A Death Tax is a tax imposed on assets left to heirs. Today it represents one of the primary obstacles for keeping family-owned ranches and farms intact and viable. To understand why, consider that ranchers – like many agricultural producers – rely on a land-rich, cash-poor business model. According to the U.S. Department of Agriculture (USDA), 91 percent of all farm and ranch assets are illiquid, meaning they cannot be easily converted to cash. When family ranchers are hit with the Death Tax, they are often forced to sell off land, farm equipment, parts of the operation or even the entire ranch to pay off their tax bill. In addition to hampering economic growth in rural communities, the Death Tax puts the dream of passing on a family-owned ranching operation out of reach.

The Bottom Line

U.S. livestock producers understand and appreciate the role of taxes in maintaining and improving our nation; however, they also believe that the most effective tax code is a fair one. For this reason, NCBA ardently supports full and permanent repeal of the Death Tax.

Why it Matters

  • The Death Tax undermines the ability of ranchers to pass on family-owned operations to their children and grandchildren, hurting rural communities that depend on agriculture
  • Managing grave tax liabilities diverts precious time and resources away from critical business decisions, such as expanding herd size or hiring new employees
  • Eliminating the Death Tax would make succession planning significantly less complex and be a boon to local rural economies supported by agriculture

Jennifer Houston, TN

As my husband and I planned for the future of our family owned livestock market, we came to the hard realization that buying our father out of the business would be necessary to reduce the Death Tax that we would owe.  It was not the best business decision, but we simply could not afford the alternative.

Kevin Kester, California

Without a doubt the biggest challenge that keeps me up at night is trying to figure out how to pass the ranching operation – our family operation on to the next generation.