Senators Chris Van Hollen (D-Md.), Cory Booker (D-NJ), Bernie Sanders (I-Vt.), Sheldon Whitehouse (D-R.I.) and Elizabeth Warren (D-Mass.) introduced the Sensible Taxation and Equity Promotion (STEP) Act last week. On a March 31 episode of Agritalk, Farm CPA Paul Neiffer, a principal with CliftonLarsonAllen, said the proposal should be sounding a "12-alarm" fire warning for farm country.
Of particular note is the measure’s changes regarding a step-up in basis. The act proposes taxing any transfer of property that has a net gain associated with transfer. At death, there’s an exclusion for the first $1 million of gain. During lifetime, any completed transfer of a trust to an individual other than a spouse beyond $100,000 of cumulative gain would be subject to a transfer tax.
Nieffer gave the example of a father transferring a part sale/part gift tractor to a son. In the past the gift was not taxable and the son would not receive a step-up in basis. Under the proposed new rule, the dad has to pay a tax based on fair market value whether he gifts the tractor or not, and the son gets a step-up in basis, adding that the tax is “purely on the income tax side.”
The act would eliminate the ability to use an intentionally defective grantor trust to avoid income tax if you sell assets to a trust. Non-grantor trusts would also have to report gains on all of their appreciated assets every 21 years. The proposal is for the measure to be retroactive to Dec. 31, 2020. Farmers and taxpayers have also set up dynasty trusts because they eliminate the estate tax, and they eliminate income taxes on the farmland with the idea being that you’re going to keep that farmland in the trust for generations to come. Nieffer says the STEP Act would require such trusts to file a return every 21 years and pretend like they’ve sold any appreciated assets for fair market value, so that land is going to get taxed every 21 years. That tax can be paid over 15 years, but it’s still due and subject to interest.
Nieffer warned an even “nastier” STEP Act 2 will be coming that deals with the estate tax and gift tax. Nieffer commented, “the step-up in basis is nice, but if I have to pay an immediate tax to get a step-up in basis, that’s not a good provision.”
Farmer critics of the proposal on the show commented that it could run counter to the Biden administration’s environmental goals, as producers would have little incentive to spend money to improve their land if it means a higher tax bill. They also commented that the measure would punish those who have “played by the rules” and benefit those who have not.
Nieffer gave “75%-plus” odds the tax will be passed “in some form.”