Farm leaders pleased no change to ‘stepped-up basis’ but other issues remain
Farm leaders said Monday they are pleased that House Democrats did not include the Biden administration’s proposed change to the stepped-up basis method of evaluating assets, particularly farm land, but said other issues in the tax proposal to pay for programs in the reconciliation bill remain.
The House Ways and Means Committee on Monday released a section-by-section fact sheet on the tax provisions in the bill that is scheduled to be considered by the committee today and Wednesday that did not include any references to changes in stepped-up basis.
Under current law, assets are valued at the time of death and heirs pay capital gains taxes on the difference between the value at the time of death and sale. But the Biden administration had proposed eliminating the re-evaluation, which would have forced the payment of capital gains taxes on the difference between the original price and the sale price.
National Corn Growers Association President John Linder said in a news release, “We are very pleased to see that the House committee did not include the elimination of stepped-up basis within its initial text. However, we are concerned with the provisions on the estate tax in the committee draft that could impact family farms. NCGA will continue to work to preserve stepped-up basis and the current estate tax exemption as this process moves forward.”
Dustin Sherer, the American Farm Bureau Federation tax expert, told The Hagstrom Report it is “encouraging” that the stepped up basis provision is not in the House proposal but that he is not sure it is dead because there is still support for it in the Senate.
“I don’t think this is a settled argument,” Sherer said.
But Brian Kuehl of KCoe Isom, the accounting and consulting firm that helped farm groups organize opposition to the stepped up basis provision, said he believes it is “90% plus dead.”
Kuehl said it’s possible that the Senate Finance Committee may not hold a markup and that Sens. Joe Manchin, D-W.Va., and Kyrsten Sinema, D-Ariz., who have been the strongest critics of the size of the proposed reconciliation package, will negotiate behind the scenes with House Speaker Nancy Pelosi, D-Calif.
Kuehl also said he does not believe the final package will cost $3.5 trillion over 10 years, which would mean Congress would not need to raise as much of an increase in tax revenue as originally projected.
Kuehl praised Farm Bureau and the National Corn Growers Association for leading the efforts to stop the plan to eliminate stepped-up basis and to highlight problems for farmers in the Democrats’ proposal.
“What’s clear to me is that the ag community did a good job of organizing around this,” Kuehl said.
He also praised House Agriculture Committee Chairman David Scott, D-Ga., other rural Democratic House members and Sinema for being outspoken on the issues.
Noting that the tax proposal was only released Monday morning and that Farm Bureau is still evaluating it, Sherer said that “there are plenty of things that create cause for concern,” including changes to income tax rates and capital gains rates and the expansion of the net investment tax which applies to companies that are organized as pass-throughs and report income on individual returns.
“Generally looking at a $2-plus trillion tax increase on farms and ranches and small businesses coming out of a pandemic seems counterintuitive and counterproductive,” Sherer said.
Farming and ranching are such capital intensive businesses that an increase in capital gains taxes will be felt, Sherer said. He also said that the chances of the proposal released Monday being enacted without changes is “zero.”
“There are things that individual members might want to see, not just what we are spending money on but how we are paying for it,” Sherer said.
But Sherer speaks for Farm Bureau only on tax policy.
Mike Tomko, the Farm Bureau director of communications, said that Farm Bureau has not taken a position on the overall reconciliation bill which contains many provisions to aid agriculture and rural America.
Sherer noted that the Democrats plan to raise revenue by increasing rates on people with incomes over $400,000 and on corporations.
Both Sherer and Kuehl noted that changes to estate taxes would be important to farmers. They pointed out that a provision to move up the end of an exemption to estate taxes from 2025 to the end of 2021 would have implications for farmers.
Kuehl and Beth Swanson, a KCOE Isom tax lawyer, said that farmers should consider consulting their accountants and lawyers as soon as possible to make changes to their estate planning.
In a news release, KCOE Isom said “Additional changes of note for agribusinesses include changes to grantor trusts and an estate tax valuation rule.”
“The proposal states that certain grantor trusts are to be treated as separate from their owners, and valuation discounts for contributions of business interests to grantor trusts would be eliminated. Should this become law it will create income and estate tax complexities around a frequently-used estate planning tool.”
“Lastly, in a supportive bid to fulfill the congressional promise not to increase any taxes on farmers, the package sets out to increase the limit of the so-called ‘special use valuation,’ which reduces the value of qualified farm real estate when it is inherited by qualified relatives who are actively engaged in the operation.”
“We dodged a big bullet,” Kuehl said, adding that most of the tax increases were not targeted at agriculture just as the 2017 cuts were not targeted at agriculture.
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