How might the 2022 election impact your farm tax situation

Chris

Barron: We are grateful that you are joining us for another episode of the Ag View Pitch, as we know that your time is very valuable. Our team at Ag View Solutions is always here for you for any questions or comments that you may have. Please feel free to reach out to us at cbarron@agviewsolutions.com. And now, here is your host, Chris Barron. Welcome everybody to another episode of the Ag View Pitch. We are heading toward an election and some other potential changes in tax law, and so we are lucky enough today to have with us Paul Niefer and In the Flesh. Paul, how's it going?

Paul

Neiffer: I'm doing better than maybe a few days ago. I had a little bit of something, don't know what it is, but yeah, I think I'm getting over it.

Chris

Barron: Well, I've been— I went when you said you would be here, I was super happy you would be here until you told me you didn't feel good. And so now we're on the other end of the room here. Exactly. You're in the flesh, but let's, uh, let's keep our distance here, right? Yep. So, um, yeah, so, you know, we're right in the middle of harvest, but we're also in the middle of an election, uh, timing or whatever, you know, as we head toward, uh, November here. And, and so what I wanted to do is just corner you while we had a few minutes and just kind of see what your thoughts are with the election, what things might we need to pay attention to and watch. So I guess a couple of questions. The first question I would ask is, um, you know, it sounds like the House is probably gonna go Republican, but you know, who knows? The media is full of crap all the time anyway.

It doesn't matter which media you listen to. So, so let's just, let's just say, okay, the, the House stays Democrat or flips over Republican, what kind of impact do you see there?

Paul

Neiffer: What changes are there? I definitely think the biggest impact that we'd be talking about from a tax standpoint is if both the House and the Senate stays Democrat. In that case, there's a pretty good chance that then the Democrats would think, okay, we got a 2-year window we have between now and 2024 to eliminate the filibuster in the Senate. And if they're able to succeed in doing that, then a lot of the, quote, bad tax policy that was being floated around in 2021 will come to the surface again. Now, with the fact that we're in a very inflationary time—

Chris

Barron: What do you mean by bad tax stuff?

Paul

Neiffer: Well, we're talking about the increase in the capital gains rate, increase in the top tax bracket, the so-called transfer tax. You know, people are talking about eliminating step-up in basis. There was never any talk about that, but having some type of transfer tax, those type of policies. And for farmers with lots of net worth tied up in farmland that want to be able to start making gifts to their kids or grandkids, that would be very restrictive under those proposals.

Chris

Barron: Just for clarity, what is the limit currently?

Paul

Neiffer: On exemption? Well, it's $12,060,000, but starting in 2023, which is only 2 and 2, a little bit over 2 months away, it jumps all the way to $12,920,000. So a married couple right now can be worth $13 or $26 million. And with, you know, taking advantage of discounts and so on, easily $40 million. And not owe any estate tax. But, you know, certainly the Democrats would like to either bring it back to the old $5 million indexed to inflation or even bring it down to $3.5 million. And you've seen what land values in Iowa have done in the last 2 years. I mean, they've gone from $10 grand to $26,000. So that, that doesn't take a lot of acres to hit that number pretty quickly.

Chris

Barron: Yeah, you could be kind of an average-sized farmer and have a lot of debt on that land.

Paul

Neiffer: But if you— now, debt, that reduces the exempt— or I mean, that reduces the amount subject to the tax. So we're talking net worth, not, not gross assets.

Chris

Barron: Yeah, net worth. Got it. Yeah. Okay, that's good just to clarify that and get that out there. And every state is a different number, right?

Paul

Neiffer: Seems like most states do not have any type of estate tax. Now, Iowa has an inheritance tax, um, around here. Illinois has got an estate tax, Minnesota's got an estate tax, but most of the other states do not have a state tax around here. Out in my area, Washington's definitely got a state tax, Oregon does. There's about 14, 15 states that do have an estate tax. Even California, which we view as sort of being the highest tax state in the country, they do not have an estate tax.

Chris

Barron: Okay, well, and Iowa has become a pretty good place to retire lately too, right, because of some of the changes that that they've put in play here.

Paul

Neiffer: Yeah, yeah. No, and, and a lot of these, um, I won't necessarily say conservative states, but the ones that have maybe been a little bit more prudent on their finances are trying to give some of that, you know, attract, attract people to stay. Yeah, attract people to stay versus going to Florida where it's warmer, right? Although it's pretty nice today, it's 80 degrees, it will be 80 degrees. Now The issue too is that's assuming if the Democrats keep control on everything. Now, we don't think that's going to happen. Likely the House will for sure go Republican, and if that happens, it's going to be sort of status quo.

Chris

Barron: I mean, not much will change.

Paul

Neiffer: Nothing will really change between now and so 2 years from now.

Chris

Barron: So what about the other way then? So let's say, you know, that the House does switch. Let's say the Senate goes Republican, then what What, what, what are you looking at there?

Paul

Neiffer: And then I think if they both, you know, if the Senate's like 52 Republican and House is a majority of 20 votes, 25 votes, um, they're going to try to push things through. But again, Biden can veto it. We'll, we'll, we'll start to see if there's actually bipartisan, you know, floating around.

Chris

Barron: Sometimes it's not all bad when the executive branch is, is either Republican or Democrat and the House and Senate are on the other side of it, then nothing can get done and we're all better off.

Paul

Neiffer: That's usually the correct way of looking.

Chris

Barron: Yeah, yeah, yeah, yeah. You— if you don't— if you have too much of either, either side, sometimes you get in trouble.

Paul

Neiffer: So yeah, well, and even Joe Manchin found out, you know, he was able to push through the quote IRA Act, but he was thinking he's going to have this new act that was going to allow him to get— be able to push projects through. Well, that's going to die, you know, it already has died. So Um, you know, trying to do a deal in DC without getting it all the way through the finish line is, is tough.

Chris

Barron: It's tough.

Paul

Neiffer: Yeah.

Chris

Barron: Okay, so, you know, that's kind of the election. You know, there's also always, you know, adjustments and tax roll changes and all that stuff. So I kind of want to get into some of that too, as, as, you know, we're in the middle or latter part of harvest, you know, kind of middle harvest as we record this, October, I don't know what I don't know what the date is today. 21st, I think. 21st of October as we record this. So, you know, there's some new inflation adjustments if you would want to hit on that. Yeah. And what does that mean? What do producers need to pay attention to there?

Paul

Neiffer: Well, we already touched on one briefly and I think it's probably the biggest one. For all the income tax brackets that are adjusted by inflation, the average increase this year was 7%. Now, it's never exactly 7% 'cause they round it to the nearest thousand or 10,000 or 100,000, whatever the number might be. So for most of those, so like your standard deduction, your tax brackets all go up by 7%. So that means essentially Chris and Alyssa get a 7% raise next year due to the fact that they're going to be paying less taxes on additional 7% of income. Now the big one, as I mentioned, was the lifetime exemption went up by $860,000. I'm gonna round to $900,000, almost $2 million for a married couple. I can still remember when the lifetime exemption was only $600,000 and that wasn't that long ago. Mm-hmm. So that's a big deal. And it's something that farmers need to take advantage of.

Another thing that I think that a lot of farmers don't understand is our exemption right now. We have what we call a base amount. That's the original $5 million adjusted for inflation, so that's going to be about $6.5 million. And then we have what I call the bonus exemption on top, on top of it. That was the Trump Tax Act that came in with the bonus exemption. And everybody thinks, hey, we get to use that bonus exemption, and then when it goes back to the base exemption in 2025, we have that still left that we can use it. No, it's use it or lose it. You use the base exemption first.

Chris

Barron: Okay.

Paul

Neiffer: And then you use the bonus exemption. So just as a quick example, let's say that a farm couple, they got together with their advisor and they said, hey, we want to gift $12 million into a trust for the benefit of ourselves or for our kids. And we have one option. One option is we're each going to put $6 million into a trust. The other option is we're going to— one of us is going to put $12 million into a trust. Okay, well, in that situation, if they each put $6 million into a trust and then 2026 happens and they both pass away, then they have no more exemption left. Now inflation will add in a little bit, whereas if one person does the $12 million, he or she's used up their exemption, but the other spouse still has 100% of their exemption. So that's something I think that A lot of people don't understand how that exemption works.

Also, the annual exemption, you know, everybody knew it was $15,000. It'd been $15,000 for I think 6 years now. It actually went to $16,000 in 2022. Well, in 2023 it's already $17,000. So now you get to give, like I can give to Chris and Alyssa and 8 is enough and all the grandkids and everything else. You know, we can give $17,000 to as many people as we want. And that doesn't eat into that lifetime exemption. So, you know, if you got, you know, 4 kids and, you know, 6 grandkids, you know, you can easily as a couple give away $300,000, $400,000, $500,000, $600,000 a year and still have that lifetime exemption left.

Chris

Barron: I just thought of something. Maybe this is not even a doable thing, but like if you've got some key employees that have been with you forever and, they're not family but they're like family, can you gift to them?

Paul

Neiffer: You can, you can gift to them. Uh, the IRS would want to be— you want to make sure you don't run it through your company, you know, company, right? That's going to be compensated.

Chris

Barron: It'd be a personal gift.

Paul

Neiffer: Yeah, but if you said, hey, this has nothing to do with work, this is just the fact that we like you and we're giving you a Christmas gift of $1,000 or $2,000, that's fine. Up to $17,000, you don't have to worry about it at all. Yeah, interesting. And then there's certainly some other exemption amounts that farmers are interested in. Section 179 is going to go up by about $100,000.

Chris

Barron: And it's what now?

Paul

Neiffer: It's about $1 million. I don't have it memorized because it keeps going. I think it's $1,160,000 right now. It's going to go up to probably about $1,250,000.

Chris

Barron: Okay.

Paul

Neiffer: I don't have that memorized yet, but it's roughly in that neighborhood. So that's, that's, that's another one that I think most farmers are interested in. And like I say, all the standard deductions. Now, the child tax credit's not indexed to inflation. If you're on Social Security, that's not indexed to inflation. Capital loss, if you have a capital loss, that's been stuck at $3,000 for 40 years now, or close to 40 years. So, those things are not indexed to inflation, but almost everything else is.

Chris

Barron: Yeah, that 7% is a big deal, but we have probably seen closer to, you know, 18% to 20% inflation, you know, at least what we see with what our clients are spending. And what I see when we go to the grocery store or the gas station or whatever is like, holy crap.

Paul

Neiffer: Yeah, I remember I went to— I, I can't— I think it was McDonald's the other day, and I ordered something and they said it would be like $12, and I'm like, that doesn't sound right. And I looked at it and I go, yeah, it's $12, you know, whereas like 3 years ago it probably been $6.

Chris

Barron: Yeah, well, when they're, they're paying their starting labor $25 an hour just to get—

Paul

Neiffer: and a signing bonus to flip burgers, that's Well, and if you walk in the front door, believe me, you're not going to get waited on. Only the drive-through gets waited on, right?

Chris

Barron: Yeah, that's crazy too, you know. Not to get off topic here for a minute, but it's like we're still having trouble finding employees. I mean, and farmers— I mean, everybody listening to this, I mean, the Dakotas, South Dakota, North Dakota, and in other areas as well too. I mean, as producers, we can't find, you know, good labor. It seems like in no industry really can right now. I still understand what's going on.

Paul

Neiffer: Our accounting industry certainly can't find it. So yeah, it's, it's, uh, to some degree, and I, I never want a recession, but, um, yeah, economically a recession is usually a little bit healthy. Yeah, it's sort of kind of purged. Yeah, purges the system, gets you a fresh start over. Uh, now when you're going through it, it's never helpful, but, uh, I, I, I think hopefully this will get people their mindset reset the way it needs to be.

Chris

Barron: No pain, no gain, right? Right. You know, if you don't— so a couple other questions here, um, Year-end tax planning is, you know, probably guys are having fun and this is kind of combine cab candy right now for them to listen to while they're harvesting and stuff. But, you know, what things do they need to be thinking about as far as, you know, prepays, deferred pay, some of those kind of things? Off top of your head, what are some of the things that, you know, farmers need to be thinking through right now as they're—

Paul

Neiffer: as we head toward the end of the year and Yeah, what I find happens too often on the prepays is the farmer does it incorrectly. And what do I mean by that is you'll look at the invoice that they, that they have from the local crop input dealership, whatever it might be, it'll say prepaid fertilizer $50,000 or deposit $50,000. If you get audited, that's not going to work. None of that's going to qualify as a prepaid. Prepaid just needs to be like any other invoice, you know, you're You bought 2,000 gallons of diesel for $5.87 a gallon, whatever it is, and an extension equals, you know, let's say $12,000, almost $12,000. It really needs to have a what is the item, what is the quantity, what is the price per quantity, and then what is the total extension. And if you don't have that, you know, and you get audited, now you're—

Chris

Barron: Say that again so everybody can pay attention.

Paul

Neiffer: This is— So you got to have the item. I don't know what it is. It can't be just fertilizer. It's got to be 28-32, whatever ammonia, whatever it is. Got to have the item, got to have the quantity, got to have the price per quantity, and then you're going to have the total amount. Now, if you have the quantity and it's got the total extended amount, maybe you don't need the price per quantity. But if you were to get an invoice from the dealership and you were buying it, just went in and bought it, typically that's all going to be there.

Chris

Barron: It's going to be on the invoice itemized.

Paul

Neiffer: Yeah, it's all going to be itemized. So, so that's the key. If you don't have that and you get audited, you know, you're just going to get that thrown out. Now what will happen is that just simply gets carried forward into the following year and you get to deduct it then, likely. But you got interest and penalties and everything else involved.

Chris

Barron: Sometimes there's the question of delivery versus expected use. So for example, you pay your seed company for seed, but the seed isn't even at the, at the dealership or at the sales agency yet, and you're not going to have it on farm, but you're still okay to prepay that because it's an intended use, right?

Paul

Neiffer: Right. Prepaid is saying what is your expected use over the next year, so you can go out a full year and what is your expected use, and you can end up having a qualified prepaid with that dealership that says Hey dealer, you're going to deliver to me sometime next year, like for spring planting. You're going to deliver the seed to me before, before spring planting. Maybe the chemicals will be for spraying and whatever it might be, uh, that's all going to be on there. So none of this is actually on the farm, it's all at the dealership, or even not at the dealership, but the dealership—

Chris

Barron: some of it might be like fertilizer, a lot of times that's on.

Paul

Neiffer: Yeah, but, uh, so that's the key on prepaids. Now on deferred payment contracts. Um, we're starting to see more litigation on this by the IRS on some big numbers like $60 million, $40 million, where the farmer really messed up. I mean, the, the—

Chris

Barron: and they'll go back multiple years too, right?

Paul

Neiffer: Yeah, they can go back, uh, 3 years or they can potentially go back 6 years if it's a, uh, if it's a gross egregious— yeah, yeah. So the key on that is make sure that you document it correctly with whoever you're buying or selling your product to. And as long as you do that, you're probably going to be okay. Now again, you know, if it's a 1-year hiccup, probably not a big deal, but if you've been doing it for multiple years, it can add up pretty fast.

Chris

Barron: And for those who are, um, doing deferred pay and then at the end of the year they're like, oh whoops, I guess I could use more income, that income can be moved correctly.

Paul

Neiffer: And it's on a contract-by-contract basis. So if you had a 5,000-bushel contract for corn at $35,000, you could bring in $35,000. You can't bring in $22,000 or $57,000. It has to be a contract by contract. Gotcha. And then one other thing I forgot to bring up is on the ERP, the Emergency Relief Program payments that a lot of farmers, especially in the Dakotas and out in my area— North Dakota's number one, it was over a billion— I continue to get people say, why can't I defer that? Well, it's very simple.

Chris

Barron: It's income in that year.

Paul

Neiffer: Well, it's Crop— it is crop insurance. It's considered the same as crop insurance. And normally you can defer that to the year after damage. Well, the damage occurred in 2020 and 2021.

Chris

Barron: Gotcha.

Paul

Neiffer: So the year after damage is already 2022. It's already happened. It's already happened. So you can't defer to another year. So that's why you're going to be stuck with that. Okay.

Chris

Barron: So talk a little bit too about bonus depreciation a little bit.

Paul

Neiffer: Yeah, we've been sort of spoiled. You know, we've had 100% bonus depreciation since September of 2017. So that's 5, 5+ years now. We'll continue to have 100% bonus for this year, but starting next year it's going to drop to 80% and then 60% and then 40%, 20%, and then 0% starting in 2027. There is some chatter, I've heard chatter in Congress, or at least in DC, about maybe extending 100% bonus through the end of 2025. And then dropping it to zero in 2026. I'm not a great fan of that. I'd rather have the slow phase-in than a cliff like that, but we'll see what happens.

Chris

Barron: How much impact would, you know, you said the R word, the recession word, you know, if you had a recession and it slowed things down to the extent that something like this is kind of an important thing to You know, do you— does your crystal ball say, you know, we could go through some cycles that this actually probably would get extended anyway?

Paul

Neiffer: Yeah, and that's the other thing. If, if we get Republicans in both House and Senate, and let's say the White House goes Republican in 2024, those are big—

Chris

Barron: you probably see it.

Paul

Neiffer: You're going to see, you're going to see it made permanent or extending it for another 6 to 10 years, however long they can extend it in the budget window. And, and I, I start to get the feeling that a lot of the Democrats don't seem to have as big of heartburn with the tax cuts as they used to. It just seems like even the proposals they had last year to eliminate a lot of the Bush tax cuts, they never made the proposal. You know, they talked about it, but the actual proposal— yeah, they really left it all alone. So I, I think I, I just don't feel that that's as much on their crystal ball, so to speak, right now.

Chris

Barron: Um, kind of the last thing to wrap up here, you know, we've— let's just talk interest rates. And, you know, we've talked inflation, you know, interest rates continue to go up. Um, any comments on that or anything that you're seeing, that you're hearing from your— the world you live in? As to, you know, how much— what's your crystal ball say, I guess? I mean, how much further do you think that, well, they can go with these, these rate increases?

Paul

Neiffer: I've actually been pretty impressed how good farmland values have held up, but I think we're maybe starting to see a flattening or a softening there. You probably know it better than I do, but it just feels like it's starting to soften a little bit. You know, when interest rates were 3 or 4% or even 5%, you know, that's kind of make that work. Yeah, but when it's 7, 8, 9% potentially, you know, if they get the federal funds rate up to 5% next year, that means prime's automatically 8, 8.5. Um, and yeah, those numbers don't start penciling very well at, uh, when you got 7 or 8% interest rate. And that's nothing compared to what it was in the late '70s, early '80s. I mean, we're still a long ways away from than that. And people have shock right now at 7. Well, you know, 7's actually not that bad.

Chris

Barron: Yeah, historically, you know, that's what Joe Vaklovic always does a good job of showing the charts, and he'll be like, okay, see where we're at? We're— this isn't— yeah, you know, we could— it could be a lot worse than this too.

Paul

Neiffer: So, well, that's why the stock market was, was going up so much, is because you had all this excess liquidity and they were trying to pump in the system, and, and now we've cut that. We've just cut it off and, you know, you're starting to see— I'm not saying the stock market's crashing, but it's, it's having a good healthy correction.

Chris

Barron: Yeah, it'll be interesting. We're getting, like I said, close to the election, and as the year kind of starts to wind down after harvest and stuff, there's a lot of things for producers to think about to, to plan their, their tax management and everything from the deferred paid stuff to the, you know, to the prepaid and all that.

Paul

Neiffer: Yeah, I got, I got a— I'm trying to remember where I'm going to be at on election night. This is like day, this is day 7 of a 43-day trip, so I'm—

Chris

Barron: and I thought I had to travel a lot. You're, you, you pretty much—

Paul

Neiffer: I think this is the new record for me—

Chris

Barron: is live on the road.

Paul

Neiffer: Yeah, yeah.

Chris

Barron: So, so sounds good. Well, um, Paul, I really appreciate you being here. If somebody has like a specific tax question or a situation that they'd like to run by you, what, what's a good way for them to get a hold of you?

Paul

Neiffer: I would say the easiest is to email me, which would be paul.neifer, so N-E-I-F-F-E-R, so paul.neifer@claconnect.com. So paul.neifer@claconnect.com. I tend to, you know, I can be reached via phone, but it's like a pain with voicemail tag and everything else. Or you can text me, hey, I need to talk to you, text me at 509-961- 9739.

Chris

Barron: Yep, that'd be good. And then let you call them back. Yeah, yeah, yeah, sounds good. So, um, I guess I think that's it. The only other last thing, last, last thing, is you're going to be at our conference. Yep, in Florida on January 25th through the 27th. Excited to have you there. Um, what, what are you gonna, what are you gonna hit on?

Paul

Neiffer: I think we're really gonna dive deep into, uh, contribution margin, uh, sort of help farmers understand that really contribution margin can be more important than net income or net profit. It definitely drives net income and net profit, but they need to understand the differences between the two.

Chris

Barron: Yep, yep. Now we're excited to have you there because we'll know how the election turned out, we'll know what some of these tax things are, and you'll be able to talk through some of that stuff as well as the contribution margin and all that kind of stuff. Exactly. So really appreciate you being here, Paul. Thank you, and And thanks to everybody for listening. Again, if you have not yet signed up, I know there's a, there's a number of you out there that are planning on signing up, and I know you're busy harvesting and stuff. You get a rain day— doesn't seem like we get rain anymore— but if you get a rain day or get a, get an opportunity to get signed up, please do that. We are starting to inch towards that, uh, where we're going to draw the line as far as attendees. So, so if you're planning on it, please get registered, and we will catch you again next time on the Ag View Pitch.