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Agriculture’s Tax Reform Tool Box

published: October 6th 2017
by: Shiloh Perry
source: American Farm Bureau

America’s farmers and ranchers work hard to produce the food, fiber and renewable fuel sources we all depend on and enjoy. Their work is noble yet challenging. Always operating in a world of uncertainty, there are no two days the same in agriculture. Whether mending a broken fence, penning cows or balancing the books, farmers and ranchers have many responsibilities each day.  They need a tax code that recognizes the work that they do and the unique challenges their businesses face.

The tax-reform framework that was released last week is very promising, but it is only a start and there is still much work to be done.

Reducing effective tax rates is the most important tax reform priority for farmers and ranchers. Typically profit margins for farm and ranch businesses are tight and rates of return are moderate at best compared to other businesses. This usually puts farms and ranches in lower tax brackets. So as important as lowering tax rates are, it is critical that any tax reform provisions are considerate of all tax brackets. 

The tax-reform framework that was released last week is very promising, but it is only a start and there is still much work to be done.

The tax-reform framework includes lower tax rates for individuals and businesses, both incorporated and non-incorporated. While lower tax rates are welcome, the tradeoffs associated with how lower rates are achieved cannot be ignored. They may come at the cost of losing certain credits and deductions that are helpful to farmers. To truly benefit agriculture, effective tax rates must be lowered enough to cover lost credits and deductions.

Further, farmers and ranchers rely heavily on multiple cost-recovery tools to run their businesses. Tax provisions like business interest expensing, like-kind exchanges and cash accounting give farmers and ranchers the flexibility they need to keep their businesses running in good times and bad.

In addition to being high-risk, agriculture is capital-intensive.  Farming and ranching requires large, long-term investments in land, buildings and equipment. Most times, these long-term investments and other major expenses an agricultural business acquires are covered with borrowed money. Deducting these expenses gives farmers and ranchers the flexibility they need to make critical investments to keep their businesses running.

Specifically, cash accounting helps offset some of the unknowns farmers and ranchers face by acknowledging revenue when it comes in and expenses when they are actually paid. It allows farmers to defer tax payment until they receive the money for the products they sell. Cash accounting also helps farmers and ranchers average their income from year to year. Agriculture is a cyclical business. For farmers and ranchers short times of prosperity can be followed by years of loss.

Now more than ever, agriculture needs tax provisions that help farmers and ranchers during the good times and bad. With the right tax reform tools, America’s farmers and ranchers will be able to work hard and be better equipped for the challenges they face. For more on Farm Bureau’s tax reform priorities,visit fb.org.

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