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A professional note to Congress: How to increase taxes on farmers and make them very happy!

David Repp Dickinson Law Des Moines Iowa Iowa Taxation LAw

Posted on 03/07/2017 at 12:28 PM by David Repp

Congress and President Trump want to significantly increase military spending, which will be paid for by an increase in taxes. Oh, excuse me, that last part was an alternative fact. The increased military spending will be paid for by a decrease in taxes through the magic of supply side economics. Most economists disagree that this can happen as polled by the University of Chicago.  

So where can Congress and Trump find the money to increase military spending without raising taxes and without increasing the deficit? That’s tough. Here is what they have to work with:

Here is an idea: Make all farm income non-taxable. Why would this work? Well, consider the fact that every year, for decades, total net farm income in the United States has been negative. Following are the aggregate losses reported by farmers on their tax returns for the last several years:

Year            Loss/Profit
2009            $14.1 Billion
2010            $11.7 Billion
2011            $9.6 Billion
2012            $5.5 Billion
2013            $7.8 Billion
2014            $8.3 Billion

This data may seem suspicious. After all, any business that loses money year after year cannot be sustained. Even if farmers ate their own food and lived in houses that they built from prairie sod, they still would need to find someone to give them money to keep farming. They all cannot have rich uncles. 

It may be getting worse for these farmers. On February 27, 2017, the IRS issued an internal memorandum to its auditing staff telling them to be on the lookout for suspicious activity on Farmers’ Schedule F.  Specifically, the memorandum instructed to look out for large prepayment of expenses close to the end of the tax year. Such prepayment may be a “deposit” to be applied against future expenses. A deposit is not deductible. The auditors were also instructed to look for personal expenses, like fuel for automobiles, that are being deducted. This IRS is optimistic that, with just a little bit of help from their audit corps, these farmers may someday be able to turn a profit.

Until the day comes that farmers finally start earning a profit, the United States government could increase tax revenues by billions of dollars simply by passing a law saying that all farm income shall not be taxed. Farmers will be ecstatic to hear of such news and Representatives and Senators will be eager to take credit. Farmers will be so happy that they won’t even notice that they will no longer have a loss to offset other income, such as a spouse’s “town job” or some other non-farm revenue. For most of these farmers, this tax exemption will turn into a tax increase, and they won’t even know it. 

This would not be the only way farmers will be duped.  Congress and Trump are proposing to eliminate the estate tax, also known as the “death tax.” This may sound wonderful to taxpayers, but consider that only people with $5,490,000, or $10,980,000 for married folk, have to pay the tax. That is equivalent to just two people out of a thousand.

The problem with estate tax repeal is that it will likely be coupled with loss of a step-up in basis. Currently, under IRC Section 1014, most assets belonging to a decedent will be stepped up to full fair market value at death. Thus, for example, if Bill Gates were to die, all his Microsoft stock with a basis of $0.00 would get stepped up to full fair market value. If his wife, Melinda, subsequently sold all his stock, she would owe no tax. If estate tax repeal occurs and the step-up goes away, Melinda may owe billions in capital gain tax. The same is true for farmers who have been enjoying step-up in value for years.  This may go away with estate tax repeal. 

Beware of Congress bearing gifts.

The material in this blog is not intended, nor should it be construed or relied upon, as legal advice. Please consult with an attorney if specific legal information is needed.

- David Repp

 

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