Farmers score some significant tax victories in legislation

Jan 4, 2013
by DTN

The dust hasn’t yet settled in Washington, D.C., but farmers can count on scoring some significant tax victories in legislation designed to avert the fiscal cliff. Chief among them are provisions renewing generous writeoffs for equipment purchases and permanent exemptions that spare moderatesized farm estates from federal tax.

“On a scale of 1 to 10, I’d definitely give it a 7,” said Paul Neiffer, a CPA and partner in the agribusiness group of CliftonLarsonAllen, who spent much of New Year’s Day studying the bill now awaiting President Barack Obama’s signature. “For the most part, terms are very favorable for agriculture compared to going over the cliff.”

One major surprise was a generous renewal of Sec. 179 and bonus depreciation rules that have allowed high-income farm operations to shelter sizable incomes in recent years. The bill extends 50 percent bonus depreciation through the end of 2013. It also hikes Sec. 179 deductions to the old 2010/2011 level of $500,000 for 2012 and 2013. Without the change, Sec. 179 would have been $139,000 for 2012 and reverted back to $25,000 in 2013.

With all-time record incomes in 2011 and 2012, crop producers found temporary depreciation limits helped them erase much of their tax liability. In 2011, small businesses were eligible to write off up to $500,000 in used asset purchases if they maximized Sec. 179 and unlimited amounts of new asset purchases using 100 percent bonus depreciation. Until Congress made this lastminute change, bonus depreciation was set to expire and that same size purchase would have been eligible for only $25,000 in Sec. 179 first-year write-offs in 2014.

The combination of Sec.

179 and bonus depreciation in recent years “allowed farmers with really good income years—who’d normally be buying equipment—to shelter much of their income,” Neiffer said. “Farmers have income averaging and the chance to expense prepaid items like fertilizer, but this [depreciation] is a biggie.” It’s something farm equipment manufacturers will celebrate, he added.

Another key rule lifts the ceiling on equipment eligible for Sec. 179. Now for equipment purchased between Jan. 1, 2012, and Dec. 31, 2013, purchases up to $2 million each year will be eligible. Until this change was made, assets of $560,000 and up triggered a phase-out of Sec. 179, so farmers who purchased two combines may have found themselves ineligible, Neiffer said.

Among other significant provisions:

Estate taxes

-- Congress set the lifetime exemption for estates and gifts at current levels ($5.12 million when indexed for inflation in 2012). Rates on any excess will be taxed at 40 percent, up from the current 35 percent rate, but not as steep as Obama first proposed.

For 2013, Neiffer estimates the estate tax exemption will run about $5.25 million. “This doesn’t solve problems for all farm estates, but it certainly reduces the anxiety,” Neiffer said. “For couples with $10 million estates now, it makes sense to gift assets on an annual basis, especially since land has been appreciating much faster than inflation. But married couples with net worths of $4 million or less are in pretty good shape federally and may only need to worry about state estate taxes.”

Income tax rates

-- Bush-era tax rates would be maintained for income under $400,000 single and $450,000 married filing jointly. For income in excess of these amounts, the rate would be 39.6 percent.

Capital gains

-- New capital gains rates apply for those with high adjusted gross incomes, but not necessarily high taxable incomes. For taxpayers who hit the new 39.6 percent marginal rate, the maximum capital gains rate is 20 percent (plus the new 3.8 percent Medicare surtax, if applicable), for a maximum 23.8 percent capital gains rate or almost 25 percent if the taxpayer has a large amount of itemized deductions.

However, capital gains rates could be 0 percent, 15 percent, 18.8 percent, 20 percent, 23.8 percent or 25 percent because they are set based on a combination of taxable income and adjusted gross incomes, before taking any itemized deductions or exemptions into account. What’s more, the new 3.8 percent Medicare surtax (enacted as part of the health care law) kicks in on passive incomes including capital gains (above $250,000 for couples).

Neiffer believes it’s possible that some single filers will owe almost a 20 percent capital gains tax but have taxable income of less than $40,000. “It’s hard to do a quick calculation,” Neiffer said. “You’ll need a computer to calculate your capital gains rate, I’ll tell you that.”

Stealth taxes

One stealth tax rule likely to catch farm land owners off guard was already set to go into effect in 2013, separate from the fiscal cliff negotiations. Starting this year, landlords with more than $250,000 incomes will pay an extra 3.8 percent Medicare surcharge tax on part or all of these cash rents. Recent IRS proposed regulations “will make it extremely hard to keep any rents out of that new tax calculation,” Neiffer said.

The brunt of tax reform is focused on high-income earners, Neiffer stressed. Some itemized deductions and exemptions will begin to phase out for taxpayers who hit their own $250,000 cliff.

The biggest change will be for taxpayers with exceptional incomes above $400,000 single or $450,000 joint, and who live in high tax states. “In effect, the top marginal federal tax rates add up to 44.6 percent, before state taxes. California adds 13 percent on top of that, for an effective tax rate of almost 60 percent. And it’s almost that bad in Oregon, New York and several Midwest states,” Neiffer added.

On the whole, however, farmers fared fairly well in the fiscal cliff debates on taxes. “They’re in much better shape than what President Obama initially proposed,” he said. — Marcia Zarley Taylor, DTN