Tax Changes Affecting Agriculture
Gregg A. Esenwein
Providing tax relief to agriculture and agricultural producers is a perennial topic of interest in Congress. Currently, the Joint Committee on Taxation has identified five tax expenditures that are oriented specifically to agriculture. Tax expenditures are defined as revenue losses that result from Federal income tax provisions that grant special tax relief to taxpayers or aid taxpayers in special circumstances. The five agricultural specific tax expenditures are:
- exclusion of cost-sharing payments,
- exclusion of cancellation of indebtedness income, and
- five-year carrybacks for net operating losses from farming.
In the 108th Congress several bills have been introduced that would further affect the tax treatment of agriculture and agricultural producers. Many of these bills were originally introduced in the 107th Congress but were not enacted.
Congressional Action in the 108th Congress
The Tax Relief, Simplification, and Fairness Act of 2003 (H.R. 1308), which was passed by the House on March 19, 2003, and now awaits Senate action, contains several provisions affecting the tax treatment of agriculture. It would modify the capital gains tax treatment of the sale of timber, it would extend the period (from two to four years) that a taxpayer is allowed to replace livestock sold on account of weather-related conditions, it would coordinate farmer's income averaging with the alternative minimum tax (AMT) so that a farmer would not become subject to the AMT solely as a result of electing to average his income, and it would ensure that the payment of dividends on capital stock by farm cooperatives would not reduce patronage income.
Senators Grassley and Baucus introduced the Tax Empowerment and Relief for Farmers and Fishermen Act (S. 665) in March 2003. It is similar to the legislation introduced in the 107th Congress. The main components of this legislation would:
- create Farm, Fishing and Ranch Risk Management Accounts (FFARRM);
- eliminate the interaction between income averaging and the AMT;
- exempt conservation reserve payments and farm rental income from self-employment taxes;
- exempt "Aggie bonds" from private activity bond volume caps;
- allow farmers a charitable deduction for contributions of food to food banks;
- extend the replacement period for livestock lost or sold due to weather conditions; and
- allow farm cooperatives to pay dividends on capital stock without those dividends reducing patronage income.
Congressman Earl Pomeroy introduced the Family Farm Simplification Act (H.R. 905) in February 2003. This legislation would simplify the application of self-employment taxes for family farmers.
In April 2003, Senator Max Baucus introduced S. 785, a bill that would allow farm co-ops to pay stock dividends without reducing patronage dividends. In the same month, Congressman Wally Herger introduced H.R. 1671 which would also allow farm co-ops to pay stock dividends without reducing patronage dividends.
In June, Senator Chuck Hagel introduced S. 1263, which would exclude from gross income the interest received on loans that had been secured by agricultural real property. Congressman Mike Thompson introduced H.R. 2513, a bill that would immediately and permanently repeal the estate and gift tax on family owned farms and other businesses.
In July, Senator Sam Brownback introduced S. 1316, a bill that would define conservation reserve payments as rental income rather than self-employment income. Congressman Lee Terry introduced legislation, H.R. 2978, which would provide up to a 50% exclusion of the gain from the sale of farmland if the land were to continue to be used for farming purposes. Similar legislation, S. 1464, was introduced in the Senate by Senators Byron Dorgan and Chuck Hagel.
In addition to these congressional proposals, President Bush's FY2004 budget includes tax provisions that would affect farmers. The President's budget proposal would allow an enhanced charitable deduction for contributions of food inventory and would exclude from taxation 50% of the gains from the sale of property for conservation purposes. Although the President's FY2003 budget proposal included a provision for FFARRM accounts, that provision was dropped in the FY2004 budget proposal.
Congressional Action in the 107th Congress
In the 107th Congress several tax related farm bills were introduced. Senators Grassley and Baucus, key sponsors of FFARRM accounts, introduced the Tax Empowerment and Relief Act (S. 312, S. 313, and S. 314). The main components of this legislation would:
- create Farm, Fishing, and Ranch Risk Management Accounts (FFARRM);
- eliminate the interaction between income averaging and the AMT;
- exempt conservation reserve payments and farm rental income from self-employment taxes; and
- expand first-time farmer loans.
The Conservation Reserve Program Fairness Act of 2001 (S. 315), introduced by Senator Brownback, would have also exempted conservation reserve payments from the self-employment tax.
In the House, Congressman Herger introduced the Farmer Tax Fairness Act (H.R. 658) which would allow farmers to disregard the AMT when calculating their regular income taxes using income averaging.
Also in the House, Congressman Tom Osborne introduced legislation (H.R. 294) that would permit taxpayers to exclude from taxation the capital gains income from the sale of farmland.
Congressman John Boehner and Senator Richard Lugar introduced the Rural America Prosperity Act of 2001 (H.R. 627 and S. 333). Among other things this legislation would;
- provide a deduction for 100% of the health insurance premiums paid by self-employed individuals;
- exclude from income taxation up to $500,000 of capital gain from the sale of qualified farmland;
- create FFARRM accounts; and
- eliminate the interaction between income averaging and the AMT.
President Bush's FY2003 budget included a proposal for FFARRM accounts.
CRS Products
From this Briefing Book:
Farm, Fishing, and Ranch Risk Management Accounts (FFARRMs)From the CRS Taxation Briefing Book:
Alternative Minimum Tax for Individuals
Congressional Proposals
Income Tax AveragingCRS Contact: Gregg Esenwein (7-7812)
Page last updated September 2, 2003.
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