Election dissection: tax implications on your farm for both candidates

Shay

Foulk: Welcome back everyone to another episode of the Ag View Pitch. Today you have Shay Foulk joined with Paul Niefer. And Paul, if you could just give us a quick background on who you are, what you do, and we'll go from there.

Paul

Neiffer: Yeah, I'm a principal with CliftonLarsonAllen, or we go by CLA now. I'm in the agribusiness group. CLA is the 8th largest CPA professional services firm in the U.S. I also write a column for Top Producer magazine, and then about Oh man, it's coming up on 12 years ago I started the blog farmcpatoday.com and, and also a blog on, on AgWeb. So that's probably a brief background, or I'm commonly referred to as the Farm CPA. So, you know, that's, that's probably my background.

Shay

Foulk: Yeah, Farm CPA Today, great blog, great information on that. I encourage anybody to go check that out. So today's conversation that I'd like to have, Paul, is, you know, kind of an election dissection, if you will, just looking at when November 3rd rolls around, whenever that date is of who gets into office, it might be weeks before we really know what that looks like. Uh, what are some of the tax law implications on that? And I'll let you kind of take this and run with it, but I think it's a really important conversation because regardless of who gets in or stays in office, I think we're going to see some changes here.

Paul

Neiffer: Yeah, and I think the easier part is to start with Trump's plan on the tax side because really there's not much of a plan. I mean, as far as having any specifics on the plan, he has indicated that he'd like to make the Tax Cuts and Job Act, all those tax reductions permanent. They're all set to sunset after 2025. He also has mentioned that he'd like to have some type of a middle-class tax cut, but really he hasn't provided any details on that. So that's really That's most of what I really know about the Trump policies after the election, similar to most of the other stuff that Trump has campaigned for. He's really rested on what he has done, not what he is going to do. And as a president, you're allowed to do that a little bit.

Shay

Foulk: So let's talk on that for a minute. When you look back over the last 4 years, hindsight's 20/20, what major changes have you seen on your end by what has been implemented under his administration? Has there been any major effects? What are they?

Paul

Neiffer: Yeah, certainly the dropping the tax rate was a little bit of a major effect. Over on the corporate side, they did drop the rate from the top rate of 35% to 21%, but that didn't really help farmers that much. They actually probably saw a little bit of an increase because they were likely paying 15%. The Section 199 Cap A 20% deduction, that's had a pretty good effect. The implementation of 100% bonus depreciation on both new and used assets. That, that for farmers has been a big boon. And then sort of loosening up some of the rules on cash method of accounting, although farmers have already really participated in that. But those are some of the key things on the income tax side. Over on the estate side, they, they doubled the estate, estate tax exemption up to almost $12 million for a person and $24 million for a couple.

So that was a major change for those farmers that let's say they own 1,000 or 2,000 acres of good ground in Illinois or Iowa or wherever it might be, uh, you know, that's about what that value would be if they don't have any debt on it. So that, that you should allow them to transfer it to theirs tax-free, but it is scheduled to expire after 2025. So it is, we only got about 5 more years where we can take advantage of that.

Shay

Foulk: So when we look at that, uh, you know, some farmers might be concerned or overly concerned, I guess, as we look at this election not fully understanding that those implications might be later on. So let's switch over to the scenario of if Vice President Biden gets into office here, uh, how might those changes be affected? And then in specific, you know, on that estate planning or some of these programs that are set to sunset in 2025, how might those be altered or changed?

Paul

Neiffer: So let's, let's make another assumption. Let's assume that the Senate switches to Democrat. If the Senate does not switch to Democrat, likely not much is going to happen because they're not going to be able to get it through, through Congress. So let's assume that the Senate is Democrat. If that's the case, and the assumption is the House remains Democratic, um, certainly on the estate side, Biden would like to curtail or have that extra exemption amount sunset probably next year. Could be 2022, sometime in that frame. Then he's also discussed either eliminating the step-up at death or having the capital gains at death. And that's actually more problematic for all of our farmers. You know, a farmer that's worth less than $12 or $15 or $20 million, really the estate tax is not a big deal.

But if their heirs are inheriting equipment or inheriting a finished good, or I mean a crop, under current law they get to step that up to fair market value and the heirs can sell it or redepreciate it. Well, that's all going to be gone if Biden eliminates step-up at death, or if he has a capital gain tax at death. Yeah, we'll have a step-up, but in order to pay for it, you got to pay income tax on it right away. So those, those would not be good provisions for farmers. But again, that's assuming, you know, the Senate switches over to Democratic control. Over on the income tax side, he wants to, you know, bring back the tax rates that were before 2018. That would be a high of 39.6%. The major one could be for some farmers is he wants to implement the self-employment tax or the full 15.3% tax on earned income over $400,000. There'd be like a donut— they call it a donut hole.

It'll be up to about $142,000 at 15%, then it's about 3% from $140,000 up to $400,000, and then above that it's going to be at 15.3%. For the— for forever, all the way up to $10 billion of earned income. Now Biden, we already know he set up an S corporation to get around this tax. So likely farmers, if this goes into effect, farmers are going to be more creative. You know, we're going to help them be creative to structure their farm operation for those farmers that are in that $150,000— well, over $400,000 range especially. Now most of those priority are taking advantage of some of those entities. You know, we've had that discussion before. Oh, other items, capital gains tax. Now this isn't going to apply to too many farmers, but what he's proposing, if your, if your income is over $1 million, those capital gains are going to be taxed at ordinary income rates, so that'd be 39.6%.

He wants to eliminate the special 20% QBI deduction if your income's over $400,000. You know, he's pegged that $400,000 as being what you call middle class. So everything above that, what he's really said is the rates aren't going to change, but how you calculate taxable income may change. So there may still be an income tax increase on middle class taxpayers. That's the problem right now. We don't have a lot of those specifics. Specifics. We need those specifics to really understand what is going to happen. But the bottom line, if the, if the Senate remains Republican, none of this is really going to happen.

Shay

Foulk: So if the Senate switches, Vice President Biden gets elected into office, and some of these changes start to occur that you outlined here, are there any things that outside of some of those entities that you mentioned there that farmers should be considering as actionable items to keep in mind?

Paul

Neiffer: Well, certainly if, if, if we get full Democratic control, I'm going to call it that, and you have a farm couple, especially if they're older, let's say in the 70s or 80s, and they got farmland that's worth $20, $30, $40 million or more, they really should be doing some type of gift to take advantage of that extra $12 million because that's going to disappear fairly rapidly. And we don't mind gifting farmland if it's it's gonna stay in the family and be farmed. Farmland really doesn't give us any value from a tax standpoint unless it's sold. And if it's not gonna be sold, let's go ahead and gift it and then we don't have to worry about it. That's something we need to consider. Now there was way too much gifting going on back in 2012 when the exemption was thinking it was going from $5 million to $1 million.

There was a lot of farm couples I think that gave away assets that maybe they shouldn't have. But we're talking about going from $12 million to $6 million when we're— you still got $6 million left. If you're going from $5 million to $1 million, $1 million is not a lot of money in today's environment. $6 million as a couple, it's really $20 million because with discounts we can get it down to $20 million. That still should be sufficient for them to live on. So that's, that's probably the one thing that I would be promoting right away if the farmer thinks they're going to be in a higher tax bracket next year, especially with the self-employment tax possibility. This is the case— instead of pushing income into 2021, maybe we want to bring it into 2020. And what I really like in that situation is what we call deferred payment contracts.

That's where the farmer sold the grain this year, but instead of getting the cash this year, they're going to get it in January of next year. But they can elect to bring the income back into 2020. That's really the best tax tool we have because it allows us to, you know, decide after the fact. We're preparing the tax return next year, we can decide, do we want that income in '20 or do we want it in '21? That's really about the only type of strategy we have where we get to make up our mind after year-end when we're doing the tax return. And it doesn't hurt them other than the fact they got to wait a couple months to get their cash, right?

Shay

Foulk: So outside of what we've outlined there, any last comments on kind of those two topics?

Paul

Neiffer: Not really. I mean, you know, the taxes, we know they're gonna— if we get full Democratic control, we know they're gonna go up. But how long are they gonna stay up? Don't know. I mean, we likely should be paying for all the stimulus that we're— that we've done and will do I mean, there's likely going to be another $2 or $3 trillion. If we get Democratic control, stimulus package is going to be $3 trillion plus, I can guarantee it.

Shay

Foulk: Yeah, spend, spend, spend, and at some point you got to pay for it. So one other, you know, or two other topics I guess I would, I'd like to hit on here, and not necessarily on the tax law side, but looking at the healthcare and the environment, right? Those are two of the major topics that both candidates have outlined or have been asked about at least, and I think is first and foremost on the American public's mind. Let's look first at healthcare. Obviously a huge concern for a lot of farming operations based on what they've seen, whether through private healthcare, the Affordable Care Act over the last decade, a lot of headache and heartache there. What are your thoughts as we move forward into the next, next presidency?

Paul

Neiffer: Yeah, so if we look at Biden, we certainly know that he wants to preserve and expand Obamacare. I mean, he's not saying he wants a one-payer system, but I think they get full Democratic control, they certainly are leaning that way, get a full one-payer system, Medicaid for all or Medicare for all. You know, over on the Trump side, we know that there's a, you know, before the Supreme Court, there's a case now that may or may not terminate some of Obamacare. It's not going to terminate all, but there's certain items. That may get terminated. Yeah, I think people with pre-existing conditions, you know, I think the scare tactic could have been if Trump gets his way, you know, people are going to lose their health insurance. I don't think— I've never heard him say that. I don't think the Republicans want that.

I just think they want to allow people more choices so they can reduce the cost of health insurance. You know, as you've seen, I mean, I know there's couples in Nebraska, I heard in Nebraska last year they're paying close to $50,000 a year for health insurance if they can even get it. So, you know, Obamacare, I think the idea behind parts of Obamacare were great, but I think the implementation, you know, in some areas just hasn't worked as well. So if you're looking for Biden or supporting Biden, likely your health insurance is going to be there, but it's going to continue to go up probably. If you support Trump and the Supreme Court goes the right way, maybe you're going to get more choices, and hopefully, you know, people with pre-existing conditions aren't going to get turned away.

Shay

Foulk: Good. I think that pretty well covers that on the healthcare end. The last comment that I have here is looking at the environment specifically, and some, some pretty, I'll say, very different ideas when it comes to this. And I think ultimately, as with any of these things, uh, generally the parties are trying to lead what they believe to be the best option for the people in the United States of America, and it's a big task. I don't think anybody underrates the amount of effort that goes into making these decisions. But as we look at some critical changes looking to be made here over the next decade, radically different plans, uh, one involving a whole lot more money, it seems, than the other, what are implications at the farmer level of these different strategies?

Paul

Neiffer: Yeah, I think, you know, it's, it's going to be interesting. I certainly, if you're looking at Trump's side, uh, he's, he's to some degree for the farmer, he's a little bit more pro-oil than I think pro-farmer. Now he's backtracked a little bit, but if he gets elected, I don't think the farmers can count on his support as much as he has in the past. That's, that's my opinion, you may agree or disagree with it, but I just get that feeling he's, I'm gonna almost say pandering to the farmer to keep that vote, but he also is pandering to the— so he's playing both sides a little bit. I think if Biden gets elected, actually maybe the farmer from an ethanol standpoint may be a little bit better off because I think Biden perceives that as being more pro-environment than oil and gas. And we already know that Biden wants to eliminate drilling on public lands.

He's said, "Well, I'm still for shale," but based on his debate rhetoric the other night, who knows? We know that they want more regulations. The Obama administration really tightened down on regulations. I think Obama, I mean Biden's going to go even farther. Trump continues to want to loosen up regulations, which I think from a farmer standpoint, we're all in favor of that. Now, there's certain regulations we probably need. You know, I think farmers do have to realize that as we see California implement 100% new cars have to be EV, electric, by 2035, that's not that far away, that's only 15 years. The days of ethanol being 15 billion gallons, those days are going to come to an end. You know, I think now I saw one study said a billion by 2050. You know, that's a long ways down the road, but we will see a curtailment in ethanol, I think, at some point, no matter who gets in, into office.

But, you know, carbon taxes, all that, you know, if we get a Biden and a full Democratic, you know, that, that's coming, you know, that, that, that's going to come for Yeah, that's probably for the farmer, a Biden presidency might be worse based on the environment than on the taxes. Because most of the farmers I deal with, it's fairly easy for us to keep their income under $400,000. I mean, with, with prepayments and, and, you know, writing off equipment and so on. I mean, I have some farmers are over that number, but I'd say 80% or more of my farmers are well under that number. So yeah, I'm not too worried about the taxes. It'd be more on the regulatory regulation and environment side.

Shay

Foulk: And I think what some of the fear is, particularly on the environment, is when farmers and people, the American public, look back in general at how the healthcare has been handled over the last decade. And like you said, the implementation behind it, there's a lot of, there's a lot of goodwill and good meaning behind it, but some of the implementation has been, you know, atrocious in some aspects. And it doesn't matter on either side. And when it comes to the environment, I know there's some different businesses and private industries as well as government entities looking at carbon tax credits and how can we effectively implement that. But I think people can see on the horizon or are worried just about some of the headaches and nightmares that might be associated to do with that. So definitely a lot to think about. You know, we're 6 days away from the election here.

I'm not sure how much is going to change between now and then. Obviously tens of millions of votes are already cast, and I encourage everyone listening, if you haven't already, to get out there. You and I were talking about that earlier. It's good to get in and vote early, don't have to wait in those lines necessarily. And any last comments here, Paul?

Paul

Neiffer: Well, I think the election is going to be close. I think just like '16, there's a lot of Trump supporters that are never going to tell you they're a Trump supporter until they put their ballot in the mail or go vote. And again, whether we like it or not, there's about 6 key states that are the election, or 7 key states, but that's how we've been set up. That's how we've done it through the last 200 and— well, 220, 230 years. And I think compared to the rest of the world, it still works pretty well. So You know, I think we need to understand that we still have it pretty good compared to anybody else.

Shay

Foulk: Absolutely, that hope and optimism is there. One last comment I'll make too, I saw something in the paper the other day that related voting to a Valentine and said voting is not a Valentine, it's not a profession of your love for the candidate, it's more of a chess move of looking for the future and the administration that you want down the road to help make the changes that, that most affect you. And from the farmer level, hopefully this provided some perspective. I appreciate your input on this, Paul. If you have any questions, you can reach out to Paul or myself or Chris here at Ag View Solutions. Thanks a lot for the time, Paul. We really appreciate it.

Paul

Neiffer: You're welcome. Thanks, Shea.

Shay

Foulk: And thank you everyone for listening to another episode of the Ag View Pitch. We will catch you next time.