Insights on 2021 Ag Taxation Policies

The questions on every farmer’s mind going into 2021, under a new administration, is what will happen to agriculture tax policy, prices and commodity support. In this CoffeeTalk, we visit with Kristine Tidgren, director of the Center for Agricultural Law and Taxation (CALT) to gain insight on how her team is answering these questions and advising those they work with.

“We (CALT) provide a lot of education for producers and those who advise producers,” Tidgren says. “Our job is to stay on top of the law and what is happening.” 

Tidgren says that one of the biggest questions and pieces of education her team has been tasked with so far in 2021 is the legislation that was passed in late 2020 which provided assistance to help producers offset low prices and rebound from a year of volatility.

“One of the things that this legislation did was extend the Paycheck Protection Program (PPP). An additional 284 billion dollars was poured back into program and opened the door for farmers to calculate PPP based on gross income rather than the net Schedule F income. The “Farmer Rule” allows farmers to apply for a loan in 2021 based on gross income or look back to their 2020 loan (if it hasn’t been forgiven) and apply for an increase,” she says.

Some farmers weren’t eligible for a 2020 PPP loan because their Schedule F showed either a loss or zero net income. Those farmers may now be able to get a first draw loan in 2021. Those who received a loan in 2020 may be eligible for a second draw loan in 2021.

Tidgren says that there is still some confusion around first draw and second draw loans and whether those can be taken back-to-back. The rules require each draw to have a minimum eight-week covered period, or time period within which to spend the funds, and those covered periods cannot overlap.  

The second draw PPP loan is based on a 25% shortfall in gross receipts in 2020 versus 2019. The shortfall can be calculated based off the comparison of the same quarter in 2020 and 2019 or total annual income deficit of 25% between 2020 and 2019.

In addition to PPP assistance, Coronavirus Food Assistance Program (CFAP) assistance also helped to offset 2020 losses. Two rounds of CFAP were distributed in 2020. In January 2021, USDA announced that a CFAP 2.1 payment would allow some contract and specialty producers to receive CFAP money in 2021. To date, no payments have been distributed as the new administration continues to review the allocation. Tidgren does encourage producers to continue to apply, however, sharing that the original February application cut-off date has been extended indefinitely.

Other potential changes, changes that Tidgren says CALT does not speculate on, may be coming down the pike for producers in the coming years.

However, that said, the removal of a step-up in basis is a proposal that farmers should be keeping a close eye on.

Basis is the cost you paid for land or the value of the land on the day you inherited it. Any increase in value of that land over the time you own it is theoretically taxable. If you sell land while alive and it has appreciated in value, the government will assess a capital gain tax which is currently maxed at 20% plus, if you’re not farming the land, a net investment income tax 3.8%. This capital gains tax rate is much better rate than the individual income tax rate of 37% plus the net investment income tax rate of 3.8%.

“One of the proposals on the table currently,” Tidgren says, “Is to completely remove the special capital gains tax rate. So, now if I’m selling land, rather than paying that 23.8% rate, I may have to pay 37%, and that’s not all, because another proposal on the table is to raise the individual tax income rate to 39.6% — which is where it was before the Tax Cuts and Jobs Act. That’s a big difference in tax.”

Under the current law, farmland can be transferred at death and the basis is reset to fair market value. This eliminates an otherwise substantial tax burden for heirs.

“When the people who inherit from me have the basis reset to fair market value, they can turn around and sell the land they have just inherited and there is no appreciation to tax because the basis equals fair market value—all of that gain went away and the government didn’t get any piece of it,” she says.

In the past, some of those appreciation gains were made-up through assessed estate taxes paid before the property was distributed to the heirs. However, current estate tax exemptions have been increased with the Tax Cuts and Jobs Act to unprecedented rates of $11.7 million for a single person or $23.4 million for a married couple in 2021.

Another obstacle that will also weigh on those working through farm succession planning is the planned sunset of many of the Tax Cuts and Jobs Act provisions in 2026.

This was a jam-packed conversation, full of farm assistance program and taxation information. Including more on the popular Like-Kind Exchange, PPP exclusions and opportunities, Economic Injury Disaster Loans (EIDL) for farmers and the Market Facilitation Program (MFP).

Watch the entire conversation on the AGI SureTrack CoffeeTalk YouTube channel and, as Tidgren encourages, reach out to CALT with any of your agriculture law and taxation questions.