Now that we’re only a few weeks away from the U.S. presidential election, we’re receiving numerous tax-related questions from our ag clients. Many are wondering how each candidate’s tax platform might impact the agribusiness industry, agricultural producers, business owners and their employees if enacted.
It’s important to keep in mind that the below proposals are just that: proposals. Any changes to tax law would need to be made by Congress, so the results of the election will not guarantee that any of the below proposals will become law.
With that said, let’s take a look at some of the potential impact:
1. Individual tax rates
Currently, under the Tax Cuts and Jobs Act (TCJA), there are seven tax brackets set at 10%, 12%, 22%, 24%, 32%, 35% and 37%. Trump proposes making these TCJA brackets permanent but is also considering whether to implement a 10% tax cut for the middle class. Biden proposes increasing the top rate of 37% to 39.6%.
Under the two candidates, who belongs in what tax bracket would be different. For example, under Trump, the top tax bracket of 37% impacts those with an annual income of approximately $615,000 and up, while under Biden, the top tax bracket of 39.6% would tighten and impact those with an annual income of $400,000 and up.
The impact: The exact impact to individual ag producers depends on your annual taxable income and which tax bracket you fall into, and that further depends on factors such as whether you’re married and/or have children, whether you’re filing joint or separate, what types of deductions you can take, etc., so the exact impact to you would depend on your unique situation.
2. Corporate tax rates
The current corporate tax rate is 21%. Trump proposes no change to this percentage. Biden proposes a 28% tax rate, with a 15% minimum tax on book profits for corporations that report more than $100 million in revenue but have paid zero or negative federal income taxes despite these net profits (note that NOL carryovers would be allowed).
The impact: Any agribusiness that is incorporated would be impacted by a change in the corporate tax rate. However, there are a lot of complexities in the tax preparation process when you take into account various deductions, carryovers, any foreign taxes paid, etc., so the exact impact would be unique to your business.
3. Capital gains tax rates
Right now, the capital gains tax rates depend on your tax bracket. Those in the 10% and 12% brackets pay 0% in capital gains taxes. Those between 12% and the top rate pay 15%. And the top rate pays 20%.
Trump proposes cutting that 20% to 15%. Biden proposes raising the rate to 39.6% for those with incomes of over $1 million.
The impact: Capital gains tax is levied on property and land sold, so any change here could impact farmers selling land. For example, for someone with an annual income of over $1 million, who sells 1,000 acres at $10,000 an acre and a basis of $5,000 an acre (gain of $5,000,000), their capital gains tax at 15% would be approximately $750,000, and at 39.6% would be approximately $1,980,000.
4. Estate tax
Under the TCJA, up to $11.58 million in an individual’s estate ($22.36 million for a married couple) is exempt from the estate tax upon their death. That $11.58 million is set to revert to $5.49 million after 2025. Additionally, assets that pass to heirs benefit from a step-up in basis, meaning if the heir sells the asset immediately, they pay little to no capital gains tax.
Trump proposes extending the $11.58 million exemption past 2025. Biden proposes to either lower the estate tax exemption back to $5.49 million, and/or also possibly tax unrealized capital gains on both estates and gifts by removing the stepped-up basis rule.
The impact: Under Biden’s proposal, there has been no mention of any additional estate tax exemptions for farmers, who typically have wealth invested in their land and little cash flow otherwise and would thus be more impacted under Biden’s proposal than Trump’s when trying to keep family farms within the family.
5. Real estate
Under the TCJA, taxes on gains of real estate property can be deferred if the owner exchanges the property for that of “like kind” within 180 days. Trump proposes extending this provision past 2025, while Biden proposes eliminating like-kind exchanges for those with incomes of over $400,000.
The impact: While like-kind exchanges usually impact real estate investors, it can be an important tactic for the agribusiness industry. Any ag producer who is planning on benefiting from like-kind exchanges in the future would be impacted by Biden’s proposed change if they make over $400,000 annually.
6. Retirement plan incentives
Eligible employees are currently allowed to contribute to a retirement plan such as a 401(k), and taxes are deferred on those contribution amounts until the employee withdraws them during their retirement. However, not all employers offer qualifying retirement plans due to cost and complexity, but many would like to offer one because it is a benefit that helps attract and retain employees.
Trump does not have a proposal related to retirement plans. Biden proposes creating an automatic 401(k) plan for those who don’t currently have access to one, as well as offering tax credits to small businesses to help offset the cost of starting or maintaining a retirement plan.
The impact: Small agribusiness employers could use the tax reductions to establish a retirement plan and help offset costs.
7. Childcare tax credits
Right now, for those who do not earn high incomes, the child tax credit (CTC) allows taxpayers to claim a partially refundable $2,000 tax credit for each qualifying child and $500 for each nonqualifying child and other dependents. The earned income tax credit (EITC) is available as a refundable personal credit for taxpayers that meet certain conditions.
Trump proposes extending these past 2025. Biden proposes increasing the CTC. He also proposes expanding EITC to older workers. Biden has also proposed increasing the dependent care credit on up to half of childcare costs for children under age 13, up to $8,000 for one child or $16,000 for two or more children for those families making less than $125,000 annually. (Those making up to $400,000 could receive a partial credit.)
The impact: Eligible agribusiness owners and employees who have children could potentially benefit from expanded childcare tax credits.
Wipfli can help answer your questions
Above are just some of the impacts ag producers may see. As we all know, these could change daily as the candidates continue their political campaigns. If you have other tax-related questions, please reach out to your Wipfli relationship executive.
We also want to remind agricultural producers that the second round of the Coronavirus Food Assistance Program (CFAP) is open for signups through December 11, 2020. Visit the USDA website to apply for CFAP, or contact us to learn more.