Devastating regulations, such as the death tax, are impeding growth and jeopardizing the long-term viability of family ranching operations. But the current system also includes critical provisions that account for the unique needs of agricultural producers.
Cattlemen and women across the country – and the rural communities that depend on them – cannot afford a one-size-fits-all approach. We are fighting for a tax code that protects family-owned ranches and revitalizes rural America.
Our specific positions are outlined to the left and below. Take a look, then make your voice heard by clicking here to contact your Members of Congress. Tell them loud and clear that America's cattle producers need real tax reform now!
In its present form the federal estate tax, also know as the death tax, is a primary obstacle to keeping family-owned ranches and farms intact and viable during generational transfers. Ranching is a debt intensive busi-ness, forcing cattle producers to rely on a land-rich, cash-poor business model. According to the U.S. Depart-ment of Agriculture (USDA), 91 percent of farm and ranch assets are illiquid. As a result, family farmers are often forced to sell off land, farm equipment, parts of the operation or even the entire ranch to pay off tax lia-bilities at the time of death.
Eliminating the death tax would not only make succession planning significantly less complex, it would be a boon to local rural economies supported by agriculture. Instead of being forced to allocate significant re-sources for life insurance and estate planning each year, livestock producers would be free to make sound business investments like growing their herd size or hiring additional ranch hands.
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.
While comprehensive tax reform has the potential to deliver significant benefits to our nation’s farmers and ranchers, it is equally important reform legislation preserves important provisions like stepped-up basis, which moves the basis of the deceased family members’ property up to the fair market value at time of death.
Assets in agriculture are typically held by one owner for several decades and resetting the basis on the value of the land, equipment and livestock on the date of the owner’s death under a step-up in basis is important for surviving family members. Discontinuing this benefit has the potential to create massive tax liability for the heirs when they ultimately upgrade or transfer these assets. NCBA supports reducing taxes for the next generation of cattle producers by maintaining stepped-up basis.
Under current law, there are two primary methods of accounting for tax purposes: cash and accrual. Agricul-tural income is largely uncertain and fluctuates based on volatile commodity markets, input costs and even weather conditions. As a result, livestock producers utilize cash accounting, which gives farmers and ranchers the flexibility they need to manage their tax burden.
In previous reform proposals, the Committee eliminated cash basis accounting for all entities, including farm-ers 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, but also 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. NCBA supports the continuation of cash accounting.
Production agriculture has high input costs, and as a result, farmers and ranchers place a high value on immediate expensing of equipment, production supplies and pre-productive costs. This includes fertilizer and soil condi-tioners, soil and water conservation expenditures, the cost of raising and breeding cattle and capital invest-ments. Given the capital intensity of agriculture, NCBA supports the House GOP blueprint’s proposal to allow for the immediate expensing of capital purchases, which we believe would be used extensively by U.S. livestock producers.
Like-Kind Exchanges (IRC Section 1031)
Like-kind exchanges are an important tax provision for farmers and ranchers. IRC Section 1031 helps farmers and ranchers operate more efficient businesses by allowing them 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 pro-duction livestock.
Like-kind exchanges have existed since 1921 and continue to be an important method for family farmers strug-gling to maintain profitable businesses as a result of commercial and residential encroachment. However, the increased demand for agricultural real estate from outside markets makes acquiring real estate to fulfill like kind exchanges more difficult. IRC section 1031 g (1) could be improved by eliminating currently restrictive, dra-conian rules and allowing farm and ranch families more time to complete these transactions. NCBA supports reforms to the current IRC section 1031 to generally provide:
“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.”
Agricultural production is capital intensive, and the majority of family-owned livestock operations are heavily reli-ant on credit. Cattle producers utilize credit for their everyday business in the form of operating and inventory loans, and in some instances long-term is only possible through debt financing. In a weak farm economy where income is restricted, producers are often forced to take on substantial annual interest expense. There is no low-er tax rate that will compensate for the removal of the deduction for business interest because interest is, and has historically been considered, a legitimate business expense. During trying times such as these, farm and ranch families don’t pay taxes because they are in loss years, so no lower tax rate will compensate for the loss of a deduction for this major, actual expense.
In addition, the need for debt financing is particularly 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 work-ers in the nation. As older producers exit the workforce, financing will be critically important for new and begin-ning farmers and ranchers looking to establish a businesses. NCBA opposes any reforms to the tax code which would create new barriers for the next generation of agricultural producers, including the House blueprint pro-posal to eliminate interest deductions for agricultural entities.
NCBA News Release (11/16/17): House-Passed Tax Bill "Step In The Right Direction"
Beltway Beef podcast (11/16/17): NCBA's Danielle Beck on Tax Reform