Potential changes in the taxation of capital gains on death for family farms has been a hot topic in farming circles for the past six months. Capital gains studies from EY, Texas A&M, University of Kentucky and Iowa State University published in the spring and summer illustrate the potential impacts on American farmers and ranchers. USDA’s Economic Research Service last week released an analysis of the American Families Plan, which suggests eliminating the enhanced base for inherited assets over $ 1 million for personal estates and $ 2 million. million dollars for estates of married couples while deferring capital gains tax on business assets as long as the business remains family-owned. The results echo many points made by economists and tax scholars throughout the current discussion.
Much of the debate around AFP’s proposal has focused on the “exemption” or, more specifically, the deferral of capital gains liability for farms that continue to be operated by the family. after the intergenerational transfer. Some analysts equate deferral to no impact. In their view, there is either a capital gains tax due at the time of death or there is not. The ERS model, which indicates that under the proposed plan only 1.1% of estates created would be liable to capital gains tax on death, appears to support this view of the ERS. AFP. Seen from this perspective, 98.9% of farms are not impacted by the changes.
However, other analysts, including many economists, tax experts, and the American Farm Bureau Federation, argue that deferred taxes on capital gains can have significant implications for a farm, even if it continues to be operated by family. This is because it is easy to say that taxes will be deferred, but it is difficult to enshrine this deferral in law in a way that fits the intention, and even more difficult for farmers to maintain. this postponement. There are many ways that “continue to be exploited by family” could work against it, including how “family” is defined by the IRS versus how the USDA defines it, changes to family status, rules regarding clawback and changes to rules regarding material participation, to name a few. So while the intention to defer taxes may be good, those deferred taxes can hang over a transaction like a black cloud. Deferred taxes can affect a farmer’s ability to obtain operating loans, make organizational changes and, in general, to manage the farm or ranch optimally. Importantly, the ERS model shows that under the proposed plan, 18.2% of estates created should have no tax on death, but could potentially have a deferred tax on farm earnings.
When deferred taxes are not viewed as the absence of taxes, the importance of the data source used by ERS in this study, the USDA Agricultural Resource Management Survey, becomes more evident. ARMS is the only national survey that provides observations on the economics of farm businesses, including tax returns, balance sheets and financial indicators, and the demographics of U.S. farm households, all designed to be statistically representative of all types of agricultural households and agricultural regions of the country. Co-sponsored by the ERS and the USDA’s National Agricultural Statistics Service, ARMS has been conducted annually since 1996.
For this study, ARMS data were examined by farm size; small farms have a gross cash farm income (GFCI) of less than $ 350,000, medium-sized farms have a GCFI between $ 350,000 and $ 1 million, large farms have a GCFI between $ 1 million and $ 5 million and very large farms have a GCFI greater than $ 5 million. As a reminder, GCFI is annual income before expenses and includes cash receipts, farming related income, and government farm program payments. It is important to note the significant difference between GCFI and the actual return to operators – the inclusion of expenses. Over the past decade, operator returns have averaged only 17% of GCFI. So please keep this in mind when thinking about the size of the trusses.
When grouped together, the ERS study found that 1.1% of farms should pay capital gains taxes on death, 18.2% should not pay capital gains taxes on death , but could have deferred tax payable if farm assets are not kept and operated by the family. , and 80.7% would have no change in their capital gains tax liability. However, when the impact of the AFP proposal is viewed through the prism of farm size, we learn more about the types of farms that would be affected. The study found that among small farms with a GCFI of less than $ 350,000, 83% would have no capital gains tax payable, 16% would have a deferred liability, and 1% would have to pay tax on capital gains. capital gains on death. It is perhaps not surprising that the results change significantly as the size of the operation increases. As shown in Figure 2, 64% of mid-size farms, 77% of large farms, and 94% of very large farms would have a capital gains tax deferral due to ATP.
Another interesting lens through which to visualize the results is the production value for the impacted areas. From this perspective, the 18.2% of estates created that would not be subject to capital gains tax on death but could have a deferred tax liability represented the vast majority – 63.2% – of the production value of the estates created. The 80.7% of estates created that would not be taxable on capital gains on death represented just over a third – 34.6% – of the production value of estates created. The 1.1% of estates created which would be liable to capital gains tax on death represented only 2.1% of the production value of estates created.
The ERS ‘The effect on family farms of the change in the taxation of capital gains on death is an important contribution to the debate on changes to the taxation of capital gains. The use of ARMS data makes it possible to specify the share of estates created which could potentially have a deferral of the taxation of capital gains which weighs on intergenerational farms. The use of ARMS data also adds important context by pointing out that it is the very farms that produce the vast majority of the country’s food, feed and fiber.