By MICHELE F. MIHALJEVICH

Indiana Correspondent

WASHINGTON, D.C. — The Tax Cuts and Jobs Act (TCJA) would have lowered the average effective tax rate for farmers had it been effect in 2016, according to a USDA report on the impact of the tax relief package.

President Trump signed the $1.5 trillion tax measure on Dec. 22, 2017. The legislation lowered individual income tax rates as well as the maximum corporate tax rate. It increased the standard deduction, the amount of property exempt from the estate tax and the deduction limit for small businesses under Section 179. The bill also kept the cash method of accounting and stepped-up basis.

The USDA’s Economic Research Service (ERS) released its report in June. Had the TCJA been in effect in 2016, it stated family farm households would have had an average effective tax rate of 13.9 percent that year, versus 17.2 percent.

The reduction in rates would have varied by farm size, with small farms (less than $350,000 gross cash farm income before expenses) seeing a decrease of 3 percentage points. Very large farms (more than $5 million) would have had a 1.7 percentage-point drop.

ERS also looked at changes in the average effective tax rate based on commodity specialization. “Producers of high-value crops – fruits, nuts, vegetables and nursery operators – and major row crops would have experienced an estimated tax rate decline of 4 percentage points in 2016 under TCJA,” the report noted.

“Producers of beef cattle, representing the greatest number of farms of any specialty, would have experienced a decline of 2.6 percentage points.”

The TCJA doubled the exemption rate for the estate tax to $11.18 million per individual. Under it, 43 estates – or 0.11 percent - would have owed estate tax in 2016, the report said. Previously, 0.86 percent would have owed estate tax.

The changes in the estate tax under the TCJA are for 2018 through 2025.

“In theory, (the tax cut package) is great,” said Danielle Beck, director of government affairs for the National Cattlemen’s Beef Assoc. “It’s difficult to say today what the impact is. Long-term, it isn’t permanent.

“For example, the ‘death tax’ has double exemption limits for eight years and then it reverts back. No one can predict when they’ll die. Farmers need that security when doing estate planning.”

The TCJA raised the deduction limit for small businesses under Section 179 to $1 million, with a $2.5 million phase-out threshold. The legislation offered 100 percent bonus depreciation through 2022 on qualifying property put into service after Sept. 27, 2017. Bonus depreciation will be gradually phased out by 2026.

“These are two huge changes,” she said. “It allows our producers to make necessary big investments in buildings and equipment.”

Michael Langemeier, a professor of agricultural economics with Purdue University, said there are several provisions of the act he considers positive for agriculture.

“Tax rates were reduced for all individuals and corporations,” he reported. “Also, the Section 179 write-off is larger than it was. The change in bonus depreciation is also a positive. There seem to be a lot of pro-business aspects, especially for small businesses. That’s very positive for rural communities.

“The act also created a Qualified Business Income Deduction (Section 199A), which will give some small businesses a deduction. It’s a deduction we didn’t have before.”

The full effects of the deduction won’t be known until the IRS issues guidance on the act later this year.

Brandy Swope, managing partner with Kline’s CPA Group in Huntington, Ind., said the first thing her farmer clients want to know is if the act is good for them. “Initially, my knee-jerk reaction overall is that it’s good,” she noted. “But I tell them we need to talk about it. I look at it as a case-by-case scenario.”

With the Qualified Business Income Deduction, a farmer who makes $100,000 of profit and is under a certain income limit will get a straight 20 percent deduction, she said.

“We don’t yet know what kind of business counts or what income counts,” she added. “If we want to make changes (to a farm operation business plan), we just don’t know the rules.”

Swope is also concerned about the lack of permanency for some of the act’s provisions. “We do joke in the office that it’s permanent until it’s not permanent. Our clients aren’t just looking at a one-year thing, but are looking down the road.”