US Capitol Office in the District of Columbia

(Photo: Iowa Soybean Association)

Policy Update: Details Matter in Estate Tax Debate

November 2, 2021

While farmers readied equipment for in estate tax debate harvest season the past few months, several proposals making changes to capital gains taxation at death for family farms have been making headlines and causing concern throughout ag circles.

One federal budget proposal in particular, the American Families Plan (AFP), would eliminate the stepped-up basis for inherited assets greater than $1 million for individuals’ estates and $2 million for couples’ estates while deferring capital gains tax liability on business assets so long as the business remains family operated. Much of the debate around the AFP proposal has centered around the exemption (or the deferral) of capital gains liability for farms that continue to be family operated after the generational transfer.

Some folks equate the deferral to no-impact, reasoning there is either capital gains tax owed at the time of death or there is not. The USDA Economic Research Service’s model, which indicates that under the proposed plan, only 1.1% of created estates would owe a capital gains tax at death, seems to support this view of the AFP. Looking at it through this lens, 98.9% of farms are not impacted by the changes.

However, many economists, tax practitioners and farm organizations, including the Iowa Soybean Association (ISA), argue that deferred capital gains taxes can have significant implications for a farm, even if it continues to be operated by the family.

Why? Because it’s easy to say that taxes will be deferred, but it’s hard to write that deferral into law in such a way that matches intent. It’s even harder for the farm’s operators to maintain that deferral.

There are countless ways that “continues to be operated by the family” could run amuck, including how “family” is defined by the IRS vs. USDA. So, while the intent of deferring taxes may be good, those deferred taxes can hang over an operation like a dark cloud. Deferred taxes can impact a farmer’s ability to secure operating loans, make organizational changes and run the farm profitably.

The bottom line is that farmers must have flexibility to adjust their business in response to market signals from domestic and international consumers. When capital gains are imposed, the higher the tax, the more difficult it is for farmers to shed unneeded assets and generate revenue to adapt and upgrade their operations.

Furthermore, the devil is always lurking in the details. While clean and simple on paper, a one-size-fits-all policy approach typically doesn’t work at the farm gate. That’s why ISA will actively and aggressively oppose these types of approaches in favor of flexibility.