Explaining: 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

 

Joel Bassinger, Feedlot Manager, Colorado

Keeping the deductibility of interest expense is critical. Cattle feeding is a highly capital-intensive business that requires massive operating lines to function.

Joel Bassinger, Feedlot Manager, Colorado

Say you are on the lower end of the range, at $50 million that you are borrowing to [run a feeding operation]. You are looking at $210,000 per month in interest expense. If you take away the deductibility of interest expense, I still have to pay my lenders $210,000 every month, but now for the purposes of the IRS I have $2.5 million more dollars of income that I am going to be taxed on. Assuming a 40% rate in a good year, that’s an added $1 million in tax burden just by losing interest rate deductibility.

  • For more information, please contact the
    National Cattlemen’s Beef Association.

    Ed Frank at 202-879-9125
    Max Moncaster at 202-879-9124

    1275 Pennsylvania Avenue NW
    Suite 801
    Washington, DC. 20004