The Truth is in the Detail- Examining 2017 Tax Reform

By David Marrison, Extension Educator

With all the changes in Washington, we at OSU Extension have gotten a lot of questions on what may be in store for tax reform n 2017?   Most of the experts are saying we will see the most comprehensive tax reform since the tax reforms of 1986 by President Ronald Reagan.

Some of these proposed tax changes could happen while others will just be fodder for talk shows and columns like this one.  Given the shift of control to the Republican side of the aisle, it is wise to look at the “A Better Way” report released by Speaker Paul Ryan last summer for some potential tax reforms.  For those who want more insight, the complete report can be found at: http://abetterway.speaker.gov/_assets/pdf/ABetterWay-Tax-PolicyPaper.pdf.

So let’s peak into the crystal ball…..

Estate Tax- At the beginning of January, House Resolution 198 titled the “Death Tax Repeal Act of 2017” was introduced into Congress and it currently sits in the Ways & Means Committee (https://www.congress.gov/bill/115th-congress/house-bill/198).  This bill is seeking to eliminate the federal estate tax.  This is one area where I caution us to be careful of what you wish for!  On the outside this may look like a good move but in the long run it could mean higher taxes for farmers and small businesses.

Currently, Americans can pass on $5,490,000 to their heir(s) tax free when they die.  The federal estate tax law also includes portability to a spouse which essentially means as a couple we can pass on a combined $10.98 million tax free to our heirs.  Even better, Ohio, led by Governor Kasich, repealed the Ohio Estate tax in 2013. So, if your estate is less than $5.49 million as an individual or $10.98 million as a married couple you should have very little concern in this area.  And given that less than 0.2 percent of all estates are subject to federal estate tax each year, should this really be on the chopping block?

So what am I concerned about?  The introduced bill has very little in the way of detail.  And the detail will be important.  One item that could disappear if the estate tax is eliminated is the ability for heirs to “step-up” the value of the inherited assets to its current market value at death.  This could be a significant loss to most farming operations.

Again, the detail in the Repeal Act will be important.  It has been suggested a complete repeal of the estate tax could pave way for a capital gains tax collection at death.  So imagine your heirs having to pay a 20% capital gain tax on the assets from your estate when you die.  For a $2.5 million dollar farm in Ohio, this would mean $500,000 in taxes versus $0 under our current system.  Ouch!  Be careful what you wish for as the truth will be in the detail!  We need to know what a repeal of the federal estate tax actually means.

Complete Expensing of Equipment & Buildings- The administration is also advocating for businesses to be able to completely write-off the expense of any building or equipment in the year of its purchase instead of recovering its value through a depreciation schedule.  This too could have some unattended consequences.  Again, the truth will be in the detail.

I think it matters very little on how we recapture the cost of these purchases. We have used Accelerated Bonus Depreciation and Section 179 for fifteen years to recapture the cost of capital purchases quicker.  My main concern is that complete expensing could cause a Net Operating Loss.  This could lead to the farm family not paying anything into Social Security and Medicare or at such a low level that it would affect their retirement years.  So while it may look good in the short term, without changes to how we pay into Social Security, it could lead to farmers not having enough eligible quarters to retire or be covered under Medicare.  Again, be careful for what you wish for as the truth will be in the detail.

Border Adjustment Tax (BAT)- There has been a lot of chatter on the potential impact of implementing a border adjustment tax or BAT.  This tax would be a huge change in the way we do business as Americans.  Currently, products shipped overseas bear the cost of income tax where imported products don’t.  In short, it could be considered a tariff without being called such.  It would be a huge revenue source for the government and would promote domestic production.  It is similar to the Value Added Tax used by many of our trading partners. The BAT along coupled with the proposed reductions in the tax rates for businesses should be a major catalyst for businesses here in the United States.

So, how will the BAT impact agriculture?  More specifically, how will it affect our trade relations especially with the top three international buyers of agricultural exports- Canada, China, and Mexico?   I think most sectors of the economy will be weighing in on the BAT issue.  Many retailers are very opposed to a border tax as a large percentage of the products they sell are imported.  For agriculture, it is anticipated it would add 10-15% to some of the costs of our inputs such as diesel fuel and to other inputs such as fertilizer and equipment.  The BAT debate is going to be fascinating to watch.  Make sure to keep asking your legislators how it will impact agriculture!

Summary- My recommendation is not to fall asleep on policy and tax reform in 2017.  Be engaged, ask questions and ask how it will impact your operation and our entire industry in the short term as well as long term.

 

USDA Makes it Easier to Transfer Land to the Next Generation of Farmers and Ranchers

DES MOINES, Iowa, Dec. 29, 2016 – Agriculture Deputy Under Secretary Lanon Baccam today announced that beginning Jan. 9, 2017, the U.S. Department of Agriculture (USDA) will offer an early termination opportunity for certain Conservation Reserve Program (CRP) contracts, making it easier to transfer property to the next generation of farmers and ranchers, including family members. The land that is eligible for the early termination is among the least environmentally sensitive land enrolled in CRP.

This change to the CRP program is just one of many that USDA has implemented based on recommendations from the Land Tenure Advisory Subcommittee formed by Agriculture Secretary Tom Vilsack in 2015. The subcommittee was asked to identify ways the department could use or modify its programs, regulations, and practices to address the challenges of beginning farmers and ranchers in their access to land, capital and technical assistance.

“The average age of principal farm operators is 58,” said Baccam.  “So, land tenure, succession and estate planning, and access to land is an increasingly important issue for the future of agriculture and a priority for USDA. Access to land remains the biggest barrier for beginning farmers and ranchers.  This announcement is part of our efforts to address some of the challenges with transitioning land to beginning farmers.”

Baccam made the announcement while touring the Joe Dunn farm in Warren County, located in central Iowa near Carlisle. Dunn is the father-in-law to Iowa native and former Marine Aaron White, who with his wife, are prospective candidates for the early termination program.  Baccam was joined by Farm Service Agency Iowa State Executive Director John Whitaker when meeting with Dunn and White.

“The chance to give young farmers a better opportunity to succeed when starting a farming career makes perfect sense,” said Baccam. “There are Conservation Reserve Program acres that are rested and ready to be productive, an original goal of CRP. The technical teams at USDA will tell us which ones can terminate from the program with little impact on the overall conservation efforts. When they do, we’ll be ready to help beginning farmers like military veteran Aaron White.”

Normally if a landowner terminates a CRP contract early, they are required to repay all previous payments plus interest.  The new policy waives this repayment if the land is transferred to a beginning farmer or rancher through a sale or lease with an option to buy.  With CRP enrollment close to the Congressionally-mandated cap of 24 million acres, the early termination will also allow USDA to enroll other land with higher conservation value elsewhere.

“Starting the next generation of farmers and ranchers out with conservation and stewardship in mind is another important part of this announcement,” Baccam said.  “The land coming out of CRP will have priority enrollment opportunities with USDA’s working lands conservation programs through cooperation between the Farm Service Agency and the Natural Resources Conservation Service.”

Acres terminated early from CRP under these land tenure provisions will be eligible for priority enrollment consideration into the CRP Grasslands, if eligible; or the Conservation Stewardship Program or Environmental Quality Incentives Program, as determined by the Natural Resources Conservation Service.

According to the Tenure, Ownership and Transition of Agricultural Land survey, conducted by USDA in 2014, U.S. farmland owners expect to transfer 93 million acres to new ownership during 2015-2019. This represents 10 percent of all farmland across the nation. Details on the early termination opportunity will be available starting on Jan. 9, 2017, at local USDA service centers. For more information about CRP and to find out if your acreage is eligible for early contract termination, contact your local Farm Service Agency (FSA) office or go online at www.fsa.usda.gov/crp. To locate your local FSA office, visit http://offices.usda.gov/.

Since 2009, USDA has invested more than $29 billion to help producers make conservation improvements, working with as many as 500,000 farmers, ranchers and landowners to protect over 400 million acres nationwide, boosting soil and air quality, cleaning and conserving water and enhancing wildlife habitat. For an interactive look at USDA’s work in conservation and forestry over the course of this Administration, visit http://medium.com/usda-results.

If Your Plane Goes Down…Will the Farm Continue?

By David Marrison @FarmTransition

On December 13, I was flying from Columbus, Ohio to teach two days of farm transition workshops for North Carolina State University and the North Carolina Dairy Producers Association.  As Delta Flight 1695 began its ascent to head south, the plane started shaking and I heard terrible back firing noises from the right engine.  When I looked out my window on the wing, I was surprised to see the right engine on fire.  The next 15 minutes were quite nerve racking and soul searching for everyone on board.  My quick disaster calculations had us only having a 50% chance of surviving at best.

Over those 15 minutes, I had time to think of all the things I had not completed and what the ramifications of my impending peril would be.  Some of the things which flashed through my mind included: Why didn’t I finish the new version of my will?  Does anyone know the combination to the safe?  Does anyone know where to find all my passwords to all the accounts?  Does anyone know where I hid the bars of gold and silver (that’s, right, I don’t have any).  Thankfully, we were able to land on a runway cleared just for us, complete with emergency vehicles.  I credit the entire Delta crew for handling this situation with a great deal of calm and professionalism. They were literally life savers.

So this year, it is my goal to make sure my loved ones and office team are prepared for a future without me.  While I am not planning to die, wouldn’t it be easier for everyone involved if a good transition plan was in the works for both home and your farm?   In fact, a good transition plan may take over a decade to execute with your farm successors. So isn’t now a great time to start?

Make a goal to get started on your farm and personal transition plan in 2017.  Begin by asking, “If my plane crashed what would be the immediate questions my successors would  have?”  and “What do they need to know in order to keep the farm chugging along?”

Start by making a list of all the key advisors and service providers that might need to be contacted.  I remember one time when my parents left for a week long school board convention and the compressor on the milk tank went down.  Luckily, my dad had a list of who to call (AI Technician, Electrician, Dairy Field Man, Feed Mill, Milk Truck Driver, and Vet) in the case of an emergency or problem.  Sounds simple enough right?

Long term, it is a great idea to make a list of all the tasks which need to be taught to the next generation. Brainstorm on the major tasks for each section of the farm business.  For instance, a list could be made up for the Financial Management aspects which need to be taught.  These could include how to print checks, how budgets for each livestock and crop enterprise are developed, how the electronic record keeping system is managed and how the balance sheet is developed for the bank for the annual operating loan.

In Crop Production Management, what are all the tasks that need to be done to raise a productive crop.  When does the next generation get to make the variety selection, determine the fertility program, decide the weed control plan, and decide how many acres will be planted of each crop?

Other areas of consideration for developing transition plans (task lists) include: Machinery & Equipment Repair, Employee Management, Livestock Management, and Marketing.

Of course, these lists can get quite long and could be overwhelming!  So, where do you start?  It has been said many times that transition planning is just like eating an elephant.  To be successful at it, you need to just eat one bite at a time!

Set goals to list all the responsibilities for each area and then see if the next generation is proficient (or has even been taught) in each of the responsibilities or tasks.  If not, decide when to teach them.  One new task taught per day means by the end of 2017, you will have taught 365 new things to your successors!  Grab a calendar and track your progress.  Just take it one bite and one day at a time.

Need more help, contact David Marrison, OSU Extension at 440-576-9008 or marrison.2@osu.edu

 

 

 

Planning for the Future of Your Farm Workshop to be held on January 18, 2017

OSU Extension will be hosting a farm succession and estate planning workshop titled “Planning for the Future of Your Farm” on Wednesday, January 18, 2017 from 9:30 a.m. to 4:00 p.m. at the Ashtabula County Extension office.  If you are thinking of how and when to transfer your farm business to the next generation, then this workshop is one which you will not want to miss.

This workshop is designed to help farm families develop a succession plan for their farm business.  Attend and learn ways to successfully transfer management skills and the farm’s business assets from one generation to the next.  Learn how to have the crucial conversations about the future of your farm.  This workshop will challenge farm families to actively plan for the future of the farm business.  Farm families are encouraged to bring members from each generation to the workshop. Plan today for the future success of your family business!

The featured speakers for this event will include: Robert Moore, Attorney at Law, Wright & Moore Law Company and David Marrison, Extension Educator for Ashtabula County.  The fee for this workshop is $20 per person with a registration deadline of January 11, 2017.  This class will be limited to the first 40 registrants.  The fee includes lunch and program materials. More information about this program can be obtained by calling the Ashtabula County Extension office at 440-576-9008 and a program flyer can be found at: http://go.osu.edu/ne-events

Changes to Federal & Ohio Estate Taxes will help Ohio Farm Families

One worry which was taken off the minds of  many farm families was the threat of the federal estate tax reverting to a $1 million dollar exemption in 2013.  This worry was eliminated with the estate tax provisions of the fiscal cliff legislation titled American Taxpayer Relief Act of 2012 in January 2013.  Farmers now can breathe easier with respect to the federal estate tax. To top it off, the Ohio legislature had also voted to repeal the Ohio Estate tax beginning January 1, 2013.  These article examines these changes and how they may impact Ohio farm families.

Federal Estate Tax Changes

The American Taxpayer Relief Act permanently sets the federal exemption for gifts and estates at $5 million instead of dropping to the aforementioned $1 million level. This amount will be indexed for inflation.  The IRS has announced the 2013 limits will be $5,250,000 up from its 2011 level of $5,125,000. It should be noted that this legislation included the word “permanent.”  This is significant as many fiscal agreements made by Congress since 2001 have contained a phase out date.

The legislation also allows for portability or the transfer of the unused exemption of a deceased spouse to the surviving spouse.  To gain this portability, the executor of an estate must properly file the deceased’s estate tax return within nine months. Once the filing is completed, the remaining exemption is transferred to the spouse of the deceased, who can then use it for her or his estate or lifetime giving. Married individuals should file an estate tax return so that their spouses can receive the exemption, no matter their wealth at the time of death.

The rate for taxing amounts in excess of $5,250,000 has increased from 35% to 40%.  But for many, this was an acceptable compromise since it was scheduled to increase to 55% in 2013 (with an exemption of $1,000,000).

Ohio Estate Tax

As of January 1, 2013, the Ohio estate tax has been repealed.  Governor John Kasich signed the provision into law on June 30, 2011 as part of the state’s budget package.  Previously, the value of any estate over $338,333 was taxed at 7%.  This limit of $338,333 was one of the lowest limits in the nation making estate planning for farm families often a tricky process.

Review your Estate Plans.

With more favorable estate tax limits at both the federal and state levels, there have been concerns expressed by attorneys that farm families should not get lulled into a false sense of security.   In the past, it was the fear of paying the estate tax which often prompted the family to visit their lawyer, accountant, and other planners to talk about farm succession and estate planning.  Farm families should take this opportunity to visit their professionals to review their plan especially to make sure that they will not exceed the limits in the future. Families should also have a plan B for if the Ohio Estate Tax returns under future governmental leadership as well as plan for long-term care, retirement, and succession.

Could the Federal government be following Ohio’s lead in eliminating the Federal Estate Tax or is this “Election Year” posturing?

By David Marrison, OSU Extension Associate Professor

The federal estate tax is currently set at 35% on estates over $5.12 million. If nothing is changed on January 1, 2013 the estate tax exemption will drop from $5.12 million to $1 million and the estate tax rate will jump from 35% to 55%. In his 2013 budget proposal, President Obama is supporting a $3.5 million estate tax exemption and 45% estate tax rate.

At the close of March 2012, Senator John Thune, Republican from South Dakota introduced the Death Tax Repeal Permanency Act S. 2242, which would permanently abolish the federal estate tax. This act would repeal the federal estate tax, repeal the federal generation-skipping transfer tax and lock in a $5 million lifetime gift tax exemption and 35% gift tax rate The Senate bill mirrors House Resolution 1259 which was introduced by House Representative Kevin Brady, a Republican from Texas.

Many farm organizations have been advocating the repeal of the Federal Estate Tax due to its effect of these businesses being able to be transferred to the next generation. National Cattlemen’s Beef Association President J.D. Alexander stated in a recent press release, “The death tax is detrimental to the farmers and ranchers who live off the land and run asset-rich, cash poor family-owned small businesses.”

According to a study by Douglas Holtz-Eakin commissioned for the American Family Business Foundation, repealing the death tax could create 1.5 million additional small business jobs and decrease the national unemployment rate by nearly 1% Holtz-Eakin is the former director of the non-partisan Congressional Budget Office.

Remember, this is an election year so there is not much hope that any action will be taken on the Federal Estate Tax until after November.

What Can I Do?

So what can farmers do? As with any legislation, take time to exercise your right to talk to your elected officials. Let them know how the changes to the federal estate tax could affect your farm. More importantly, schedule an appointment with your attorney to make sure your estate plan is up to date. Be proactive not reactive! To contact your elected officials, go to the House of Representatives website at: http://house.gov/ and search for your local congressman using the Zip code search engine and your State Senators at: http://senate.gov/ and search by state. You can also access and monitor the progress of Senate Bill 2242 and House Resolution 2242 at these sites as well.

Federal Estate Tax Exemption Limits Set To Drop in 2013

By David L. Marrison, Associate Professor

At the end of 2010, President Obama signed “The Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010.”  Most will remember that this bill extended many of the Bush era tax cuts.  What many do not remember is that this legislation also made some significant changes to our federal estate tax laws. And quite frankly, this is the one area that concerns me the most when I think of the future of many of our farms across Ohio.

The estates of every U.S. citizen are subject to the federal estate tax upon their death.  However, a certain potion is exempt from the tax. In 2012, this exemption is $5.12 million.  Therefore, in 2012 if the value of the net estate – meaning the gross estate reduced by allowable estate tax credits and deductions – does not exceed $5.12 million, then the estate will pass to the heirs free from federal estate taxes.  Any amount above $5.12 million is subject to a 35% tax.  The increase to a $5 million exemption was a welcomed relief as individuals developed their estate plans.

The increase to the $5 million exemption is short lived as the increase only applies to 2011-2012.   Congress must revisit the estate tax laws before the end of 2012, otherwise we will revert to pre 2001 exemption levels.  This means that on January 1, 2013, the federal estate tax exemption will drop all the way down to $1 million and the estate tax rate will jump up to 55% (Ouch). This could affect hundreds of farms, small businesses and recipients of oil & gas lease payments.  It is not hard for many of our farms to be valued at over $1 million dollars.  Can you afford to pay a 55% estate tax on the value above $1 million?  This could be a nail in the coffin for many small farms trying to transition their farm to the next generation.

So what can I do?  I think it is imperative that farmers exercise their right to talk to their elected officials.  Let them know how the changes on the bonus depreciation measures and the federal estate tax could affect your farm.  More importantly, schedule an appointment with your attorney to make sure your estate plan is up to date.  Be proactive not reactive!

Contacting Your U.S. House of Representative

Go to the House of Representatives website at: http://house.gov/ and search for your local congressman using the Zip code search engine and your State Senators at: http://house.gov/ and search by state.

 

Family Business Meetings–Helping Farms Communicate

by David Marrison

Tommorrow, I will be teaching at the Kentucky Cattlemen’s Convention about communication issues for farms in transition.  Poor family communications are at the center of many farm transition and estate transfer problems.  One way which farm families can improve communication is to hold family business meetings.  Chris Zoller of Ohio State University wrote a nice factsheet on tips for successful business meetings and it can be found at:

http://ohioline.osu.edu/bst-fact/pdf/3612.pdf

What other strategies have you found to improve family communication?

New Rules for Estate Taxes

by Jim Skeeles & Chris Bruynis, OSU Extension Educators

Congress passed new legislation in December affecting estate taxes, but only for 2011 and 2012, reducing federal taxation of large estates. This legislation affects families with an individual who dies in 2011 or 2012 and has assets more than one million ($1M) or an individual that gifts more than $1M dollars during this period.

With this law change, an individual can pass on a total of $5M worth of assets with no federal estate or gift tax due. Further, if the net worth of an individual’s estate combined with the total counted amount given exceeds $5M, the federal estate and/or gift tax rate has been reduced to 35%.

Also upon the death of the first spouse, the surviving spouse now receives the unused $5M exclusion of the deceased spouse. Since the surviving spouse also has her exclusion of $5M she now can transfer assets totaling $10M, either by giving them away, the assets going through her estate, or a combination of the two.

Since the federal estate tax and gift taxes are “unified”, the $5M exemption is for the combination of the value of the estate and total value of “counted” gifts over a lifetime. For instance, if the value of one’s estate is $5M and counted gifts of $1M were made over that person’s lifetime, for a total of $6M, then the amount over the exclusion, the $1M, would be taxed at 35%.

However, if the estate value is $1M with counted gifts being another $1M, the unused exclusion that could be passed onto a surviving spouse would be $3M [(5M exclusion – 1M used for estate – 1M used for gifts = 3M available to be passed onto surviving spouse) + 5M exclusion of surviving spouse = 8M available exclusion to surviving spouse].

Any assets given per person per year that total over $13,000 (has increased from $10,000 originally since indexed for inflation) count against that individual’s $5M unified exclusion. Each time a gift is over $13,000 per person per year the giver is required to file a gift tax return listing all such gifts with their income tax return for that year.

If the total counted gifts accumulate to more than $5M during one’s lifetime, gift tax will be assessed at 35% for the amount exceeding the $5M, to be paid along with income tax. If that occurs, there will be no estate tax exclusion left so estate taxes will be assessed at 35% on any countable assets in the estate.

These estate tax and gift tax changes will give a reprieve to those with estates over $1M, but only for the next two years. Those families with large estates who live into 2013 will have to give away assets to lock in these provisions. Keep in mind that if you are going to “give” assets through a trust and have them qualify for the exclusion that the assets have to be truly given and no strings can be attached. That means that assets must be truly given away or given to an irrevocable trust with someone else being the trustee.

Ohio House introduces bill to repeal Ohio estate tax

This was posted on Peggy Hall’s AG Law Blog yesterday.  Good update

Ohio House introduces bill to repeal Ohio estate tax

Posted: 24 Jan 2011 02:13 PM PST

A bill introduced in the Ohio House of Representatives proposes a complete repeal of the Ohio estate tax.  Representatives Grossman and Hottinger introduced H.B. 3 on January 11, 2011. The bill is simple:  it amends the estate tax provisions currently in Ohio law to state that the tax provisions apply only to estates of persons who died before January 1, 2011. Regardless of when the bill would become effective, persons dying after January 1, 2011 would not be subject to the estate tax. The bill also removes the estate tax return filing requirement for estates of persons dying after the January 1, 2011 date.

The Ohio estate tax is a graduated tax on a person’s gross taxable estate, less deductions and exemptions.  An estate valued at less than $338,333 pays no tax due to credits and exemptions included in the law.  Estates between the value of $338,334 and $500,000 pay a 6% estate tax while estates over $500,000 in value owe a 7% estate tax.  The state receives 20% of the estate tax revenue and the local government of the decedent’s residence receives the remaining 80% of the tax.  Ohio is one of 17 states that have an estate tax.

How is agriculture affected by the Ohio estate tax?  It’s not uncommon for a farm estate to be valued at the taxable threshold of $338,334.  However, qualifying farm properties that elect the special use valuation option in the estate tax law can further reduce the taxable amount of the estate up to an additional $500,000.  The special use valuation election provides that qualifying farmland will be valued at the lesser Current Agricultural Use Valuation amount; qualifications for the election relate to keeping the farm in the family.  Sound planning and proper use of special use valuation thus can reduce the Ohio estate tax burden for farms that intend to continue the farm business after the loss of an active farm family member.

The idea to repeal the estate tax is not a new one; several prior attempts have not met with success.  A bill identical to current H.B. 3 was proposed last year, but the bill never made it out of the House Ways and Means committee.   Will the change in Ohio’s elected officials yield different results?  The current House Ways and Means committee will hear sponsor testimony on the H.B. 3 at its hearing on January 26, 2011.