Prepare now for likely tax changes

Here’s what’s in the proposed tax bill that could impact your financial bottom line

The Biden administration’s proposed tax changes could have big implications for your farm or ranch this year and next.

Political wrangling has kept the tax measure in flux, but many expect a bill to become law later this year. Here’s what’s in the proposed legislation that could impact your financial bottom line:

For individuals and partnerships

• An increase in the capital-gains rate for certain high-income individuals. The provision increases the capital gains rate to 25%, from 20%. If the tax bill becomes law, this provision would become effective dating back to April 2021.

 • An increase in the top marginal individual income tax rate. More important for next year, this provision increases the top marginal individual income tax to 39.6%, up from the current 37%. This marginal rate applies to: married individuals filing jointly with taxable income over $450,000; heads of households with taxable income over $425,000; unmarried individuals with taxable income over $400,000; married individuals filing separate returns with taxable income over $225,000; and estates and trusts with taxable income over $12,500.

The amendments made by this section apply to taxable years beginning after Dec. 31, 2021. 

• Estate-planning changes.The tax proposal would eliminate the “doubled” estate-tax exemption, reducing estate and gift tax exemption to approximately $5.8 million beginning in 2022. It also includes proposed changes to tax treatment of grantor trusts previously excluded from an individual’s taxable estate, as well as changes to valuation discount rules for transfers of entity interests. The legislation proposes an increase in available valuation reduction for qualified real property.

For corporations

• An increase in the corporate tax rate.This provision replaces the flat corporate income tax with a graduated rate structure. The rate structure provides for a rate of: 18% on the first $400,000 of income; 21% on income up to $5 million; and 26.5% on income thereafter.

The benefit of the graduated rate phases out for corporations making more than $10 million. Personal services corporations are not eligible for graduated rates. The domestic dividends-received deduction is adjusted to keep the tax constant on domestic corporate-to-corporate dividends.

• Business income concerns. The tax proposal applies a Net Investment Income Tax to active trade or business income of individuals with taxable income in excess of $400,000 (or $500,000 if married filing jointly). NIIT is a tax on investment income such as capital gains, dividends and rental-property income. The proposed tax measure adds another 3.9% on top of the 39% tax.

Clean-energy incentives

Lastly, there are some attractive clean-energy incentives that offers benefits for farmers, ranchers and rural residents. The proposed bill extends:

• The tax credit for renewable energy production. That includes wind, solar, biomass, geothermal and hydropower projects;

• The tax credit for capturing and sequestering carbon dioxide to reduce greenhouse gas emissions. The credit will primarily benefit those with investments in ethanol plants;

• The tax credit for installing renewable electric systems on a residence. Also known as residential energy efficient property, this credit includes solar panels for a home water heater, household-sized wind turbines and geothermal heat pumps; and

• Increases and modifies the new energy-efficient home credit. This includes energy-efficient interior lighting, HVACs, water-heating systems and exterior insulation.

I strongly urge you to meet with your certified public accountant as soon as possible to discuss how the new tax bill could impact your farm or ranch and to prepare strategies that will minimize financial risk. Together, you can explore tax-smart strategies before the end of the year to help you manage, defer and reduce taxes as well as make long-term financial-planning decisions.

Editor’s note: Maxson Irsik, a certified public accountant, advises owners of professionally managed agribusinesses and family-owned ranches on ways to achieve their goals. Whether an owner’s goal is to expand and grow the business, discover and leverage core competencies, or protect the current owners’ legacy through careful structuring and estate planning, Max applies his experience working on and running his own family’s farm to find innovative ways to make it a reality. Contact him at [email protected].