Friday, July 22, 2016
The U.S. House Ways and Means Committee has released a “Blueprint for Pro-Growth Tax Reform” that has some possible implications for agriculture. The Blueprint reveals a flat tax rate of 25 percent on business income, with a 20 percent corporate rate applicable to C corporations. It also appears that the idea is to combine income from business activities with individual income. The non-business individual income would have a graduated rate schedule, with three brackets: 12%, 25% and 33%. The Blueprint also states that net interest expense would no longer be deductible. That could be a sticking point for agriculture because farmland is used directly in producing income. Also, with a flat business rate, farm income averaging would no longer have any relevance.
Under the Blueprint, depreciable assets, whether new or used, would be deductible in the year purchased. As a consequence, I.R.C. §1031 exchanges for depreciable assets, but not land, would be irrelevant. That would also be true for the repair and capitalization regulations that practitioners have started dealing with over the past couple of years. Also, the pre-productive period capitalization rules of I.R.C. §263A would likely no longer apply, except maybe for nurseries that buy products that are not seedlings and grow them to a larger stock. So, I.R.C. §263A would continue for inventory accounting, but would be rendered moot for self-constructed assets. That means that a taxpayer operating an orchard or vineyard would benefit, in that all costs would be fully deductible.
It’s an interesting Blueprint with some unique ideas, particularly the separate treatment of business income from individual income. It’s an evolving process. If business income is taxed separate from individual income, a great deal of the complexity of the individual tax return could be eliminated including, for example, the passive loss rules of I.R.C. §469 and (perhaps) the at-risk rules of I.R.C. §465.
At the present time, it looks like the Blueprint idea would become a legislative proposal if the House stays in Republican control after the November election, regardless of who occupies the White House. Expect the House to take the lead on this issue. In any event, agricultural interests need to stay tuned-in.
The Blueprint can be found here: http://waysandmeans.house.gov/taxreform/