Stay alert: A new round of proposed tax changes has arrived—and more could be coming

Have a trust or S Corporation? The latest plan to pay for President Biden’s social and climate-change agenda could raise your taxes

If you’re moving forward with tax strategies based on President Joe Biden’s proposed domestic agenda before Oct. 28, stop and take another look. Most of what you heard has been completely replaced with new proposals.

Amid continued haggling between Democrats and Republicans—and even within their own parties—Biden unveiled a new framework in late October that he hopes will push forward his social and climate-change agenda.

The updated measure includes new plans to pay for the largest portion of Biden’s “Build Back Better” framework, which is estimated to cost $1.75 trillion. Paying for this means changes in what had been previously proposed—and additional taxes for some Americans.

Most of those proposed tax increases won’t affect the majority of rural farms and businesses. They’re really designed to levy taxes on the ultrarich. Biden wants to ensure that the highest-income Americans pay their fair share.

But there are still provisions that could impact family-owned and other agricultural businesses. Among them is a proposal to expand the Net Investment Income Tax. Currently, this is a 3.8% surtax on your modified adjusted gross income. It’s generally paid by high earners, those with more than $250,000 in investment income. Those earnings include interest, dividends, capital gains and passive activities from investments.

Further, the plan would remove the NIIT exemption for active income from pass-through entities, including S Corporations. This means thousands of S Corporation businesses, including agricultural entities, would pay a higher NIIT tax.

Trusts likely to pay higher taxes

Another portion of the updated tax plan would directly impact trusts. Its architects want to increase the income tax rate for higher earners. On individual income taxes, they propose a 5% surtax for those earning more than $10 million in a year, and an additional 3% for those making more than $25 million. But for trusts, the plan would apply a 3.8% surtax when their taxable income exceeds $13,000, a 5% surtax over $200,000, and an additional 3% over $500,000.

Many farms and ranches have trusts because they are very useful tools in succession planning. Most of these trusts include real estate, which often is the biggest asset. With farmland values rising, and rental income often based on fair market value, it’s easy for a trust to bring in $200,000 a year. And that means more taxes ahead.

While many think the proposed legislation could pass before year’s end, there’s no certainty that what’s in the bill now will remain unchanged. Already, tweaking is underway as Democratic leaders look for support to advance the plan. Some centrist Democrats are calling for additional analysis of their cost. Moreover, the Congressional Budget Office is still assessing the cost of the federal spending package. And no Republican lawmakers in either chamber are expected to support the $1.75 trillion legislation.

These tax proposals are heavy items for many businesses. If your business is structured as an S Corporation or you’ve set up a trust, reach out for help as soon as possible to learn the latest changes and to reevaluate how they will impact your farm or ranch.

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, Maxson 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].