Proposed Tax Reform and the Effect on Agriculture

Several provisions of the American Families Plan (AFP), announced by the Biden Administration on April 28, may significantly impact the agricultural industry by altering or repealing current tax treatments that benefit agricultural businesses.

Stepped Up Basis

Stepped up basis is an adjustment to the cost of assets that have appreciated in order to reduce the amount of capital gains incurred by those inheriting the assets. In the agricultural sector, it is common for farms to pass on to the next generation. A fact sheet released by the White House states that family-owned businesses and farms will be exempt from this change if assets are passed to an heir who continues to run the business.

Like-Kind Exchanges

The AFP would limit IRS Code Section 1031 like-kind-exchanges by capping tax-deferred gains at $500,000. Section 1031 is a tax deferral mechanism that allows a gain on the exchange of realty to be deferred. Capping the deferral amount at $500,000 would not only have a substantial effect on the real estate industry, but would also impact agricultural exchanges, as farmers often buy and sell land to accommodate crops and to respond to industry changes.

Farmers were already affected by changes to the rules governing 1031 like-kind exchanges in 2017, when the Tax Cuts and Jobs Act (TCJA) limited the exchanges to real property. Previously, farmers had employed this tool in the tax code to ease the burden of upgrading machinery and equipment.

Conclusion

In light of these proposals, alternative tax strategies may become necessary. Please consult your Marcum tax advisor to discuss strategies appropriate to your specific circumstances. Marcum will continue to keep you informed should these proposals be signed into law.