Future Changes to the Ag Tax Code Could Change How You Think About Your Ag Business

According to the USDA’s 2019 report, there are currently more than 2 million farms in the United States representing $3 trillion in assets, and almost 90% of those are considered “small family farms.”  These establishments are defined as earning up to $350,000 gross income annually.  “Midsize family farms” earn up to $999,999 annually and make up another 5.5% of farms.  Together, small and midsize family farms occupy 68% of the farmland in America but produce only 41.7% of our nation’s agricultural products.

It’s common for these farms to be held and operated within their families for many generations.  The demographics of farm owners are aging, however, making the future of these companies unclear.  According to the National Farmers Union, more than 80% of U.S. farmland is owned by someone older than 55, and 50% of U.S. farmland is owned by someone older than 75.  That being the case, some experts estimate that approximately 400 million acres of farmland (that’s 70% of US land in agriculture!) will transition in ownership over the next decade.

Passing down a family farm from parent to children has long been a profitable business decision.  The value of farmland has tripled over the past 50 years to an average of about $3,160 per acre.  With an average farm size of 444 acres, the real estate purchased in 1970 at $1,000 per acre is now valued at $1.4 million–appreciation of nearly $1 million.

Farming real estate is an asset subject to the “Step-Up in Basis” provision of the tax code.  In essence, when a property owner dies and the farmland is transferred to another individual, the current valuation becomes the new fair market value of the asset, thus reducing or eliminating any capital gains tax owed by the recipient of the property.  So, in the case of the 444 acres in the above example, if the owner died and passed the property to his daughter in 2021 with a value of $1.4 million, the daughter would not be responsible for capital gains and receives the property with a base value of $1.4 million.  That means that she can decide to operate the business or sell the property without adverse tax consequences of capital gains.

This ag tax code provision has made it very advantageous to keep farms in the family versus selling the business or merging with another farm.

However, all of that may change.

ag business family farmIn 2021, the Biden Administration offered a series of recommendations intended to pay for his proposed $3.5 trillion budget reconciliation plan.  One of those was to end the Step-Up in Basis provision.  His team estimated such a change would result in an additional $322 billion in new federal tax revenues.

This resulted in protests across the aisle, and the Agriculture Secretary tried to appease opponents of the recommendation by adding two assurances:

  1.  The capital gains tax would only be applied when or if the property was sold, not when the property simply transferred hands.
  2. All farms subject to a capital gain of up to $2.5 million would be exempted–eliminating 95% of family farms from impact.

Currently, it appears farmers can take a sigh of relief.  The Democrats on the House Ways and Means Committee did not include this recommendation as they approved their work on the reconciliation bill last week.  While it’s off the table for now, though, it could return later as the package continues to seek approval from the House and Senate or as a solution to pay for a future budget reconciliation package down the road.

What this means for current farmers is that it may not be nearly as desirable to hold on to a family farm for the promise of future tax benefits like this.  Instead, ag business owners should conduct concrete evaluations of their operations and make grounded decisions about continuing to operate versus selling the farm or merging with another outfit.

How Does a Farm Owner Make Those Difficult Decisions?

WEnd Consulting can help.  Our professionals come from the industry, and we’re prepared to help you understand the current status of your business and what opportunities for success look like.  We’ll review your financials and make recommendations to help your operations become more profitable:  from implementing new software to outsourcing administrative functions or connecting you with other farms you may want to merge with.  Contact us today to learn more about how we can help you reach your goals.

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