Community Ag Alliance: New tax bill and small business and agriculture
December 8, 2017
When I first started writing this article, the House of Representatives had just approved a new 500-page tax bill. I had planned to focus on planned changes to the estate tax, and the implications this might have for agricultural operations. The Senate had not yet approved anything and there were no drafts of a Senate bill available for review.
As I write this, the Senate has approved its own version of a tax bill which differs in numerous ways from the House bill. Now, representatives from the two legislative bodies will meet to try and reconcile their differences into a single bill that could be approved by both, and then go to the president for signature.
Aside from the legislative bills themselves, including HR 1 and the Senate version of HR 1, there has been a bit of summary and commentary in newspaper articles and tax journals. However, with the extent of proposed changes and the number of pages of the bills, it is difficult to find a clear description of what Congress has done so far.
It is safe to say that the proposed changes are going to impact nearly all households and businesses. The impacts will be both positive and negative and will change in upcoming years. And, if you have read this far, you should review the changes and let your representatives know your opinion before everything is finalized in a likely reconciliation.
Small business tax
Although much of the focus of the changes is to lower the corporate tax rate, Congress has recognized that many — if not most — corporate entities are small businesses that usually pass through their profits or losses to the individual owners. Then the individual owners report this information on their individual tax returns and pay taxes at individual tax rates. This is true for many of the farms and ranches in this region, that have been organized into a small business entity.
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To provide some tax break to small companies, like limited liability companies, "s" corporations and partnerships, the proposals include tax reduction for some of their profits.
Since this concept, on its face, will encourage small business owners to configure their income as corporate at a low tax rate, there are complex rules that each proposal has included to try and limit abuse.
The commentary on these proposals is that the impacts and rules on how this would work are not yet clear. This will have to wait for reconciliation and a single bill. The most recent commentary I have seen on this change to the tax law suggests the likelihood that the simpler approach from the Senate bill is likely to prevail over the more complex terms of the House bill.
For many in agriculture and small business, the last round of estate tax changes, in 2012, created sufficient exemption that no estate taxes would be incurred. An individual had a $5 million exemption; a married couple had a total exemption of $10 million and there were annual increases built into these exemptions. The changes proposed in the pending tax legislation would increase the levels of exemption and, under one proposal, eventually do away with the estate tax completely.
On its face, there is not a great deal of difference between the House and Senate versions that were approved. The House bill would increase the personal exemption from $5 million to $10 million in 2018; then, in 2023, the estate tax would be repealed. The Senate bill would double the current personal exemption from approximately $5.49 million to approximately $11 million, but would not subsequently repeal the estate tax.
In any event, if you have not reviewed your will, trust or estate plan since 2012, you should do so with your attorney promptly, since the overall plan of increased exemptions will frequently allow an estate plan to be simplified substantially.
Richard Tremaine is an attorney for Klauzer & Tremaine, LLC.