Taxes are a big part of any business — produce and floral included. Republicans in the U.S. Congress, as well as U.S. President Donald Trump, have promised a sweeping federal tax overhaul. Of particular interest to PMA members is a significant reduction of the corporate income tax, the potential repeal of the estate tax, and a border adjustment tax. Though the broader tax reform discussion
is still developing and not expected to materialize until late 2017 at the earliest, the insight we have at present on tax reform comes from “A Better Way” — a congressional Republican agenda announced in June 2016 highlighting several policy priorities of the party including a section on tax reform.
PMA is monitoring this important issue so we can communicate with members those elements most relevant to produce and floral business. On all tax matters, PMA members should consult their tax advisers. A tax adviser can help growers and others understand the impact of proposed changes to help PMA member companies determine whether they want to take action with elected leaders before proposals become regulations. Be sure your representatives and senators in Washington, D.C., understand your positions on any proposals that affect your business. The following summaries of the administration’s tax proposals can get you started.
Corporate Income Tax
One facet where the White House and the congressional Republican tax proposals differ is the proposed corporate income tax rate. The “A Better Way” agenda calls for cutting the corporate income tax rate to 20 percent, and the tax rate for pass-through entities to 25 percent. The White House plan would cut the corporate income tax to 15 percent. According to reports, President Trump told aides it was not important whether this cut would add to the federal budget deficit.
Repealing the Estate Tax
In the “A Better Way” platform, Republicans call for the outright repeal of the estate tax and generation-skipping transfer taxes. This plan will, according to the platform, “allow family-owned businesses to transition smoothly from generation to generation, without the burden of the estate tax that today can leave grieving families with no choice but to liquidate the family business to satisfy the estate tax obligation owed to the government upon the death of their loved one.” In testimony to the House Agriculture Committee, the American Farm Bureau Federation says the estate tax, “disrupt(s) the transition of farm and ranch businesses from one generation to the next.” That is important to farm families regardless of what they grow, including the many family farms that supply fresh fruit, vegetable and floral products. PMA members can expect the proposed estate tax repeal to play a significant role in shaping our federal tax reform negotiations.
Border Adjustment Tax
PMA members may have already seen the Issues Leadership article covering the proposed Border Adjustment Tax and its effects on trade and PMA members. As mentioned in that article, the official proposal for a border adjustment tax has not been released by Republicans in Congress. The effects of such a tax, however, could significantly affect many PMA members as almost $30 billion of fruits and vegetables were imported into the United States and $14.4 billion were exported in 2016. Additionally, cut flower imports to the United States were valued at more than $714 million in 2016.
Under the current blueprint in the “A Better Way” platform, border adjustability is directly linked with the ability to reduce corporate income taxes. The issue appears to remain top of mind for Republican leadership. The House Ways and Means Committee, which has jurisdiction over government revenue, was planning to hold a hearing in the second quarter of 2017 to discuss border adjustability.
Agriculture’s role in tax reform
The “vast majority of farms are organized as pass-through entities that are not subject to income tax themselves. Rather, the owners of the entities are taxed individually on their share of income,” said Dr. James Williamson, a U.S. Department of Agriculture economist, in his testimony at a House Agriculture Committee hearing examining the impact of the U.S. tax code on the agriculture industry. During the hearing, led by Chairman Mike Conaway (R-TX) and Ranking Member Collin Peterson (D-MN), Dr. Williamson went on to say, “There were just under 1.9 million individual Form 1040 returns with a Schedule F in 2015,” which represents approximately 1.3 percent of all individual tax filers. Dr. Williamson concluded, “The individual income tax is significantly more important than the corporate income tax for understanding how taxes affect most farmers.”
Other tax issues highlighted at the hearing include:
- Accelerated Cost Recovery: In 2015, Congress passed the PATH Act, which made permanent the $500,000 threshold for Section 179 small business expensing. The bill also provides immediate cost recovery through bonus depreciation.
- Cash Accounting: Farmers are able to use cash accounting, which can reduce taxable income through prepaid business expenses, deferred farm income, or certain capital purchases. According to the American Farm Bureau Federation: “Under a progressive tax rate system, farmers and ranchers, whose incomes can fluctuate widely from year to year, will pay more total taxes over a period of time than taxpayers with more stable incomes. The flexibility of cash accounting also allows farmers to manage their tax burden on an annual basis by controlling the timing of revenue to balance against expenses and target an optimum level of income for tax purposes.”