USDA analysis skewed by including many small farms and not including non-operating landlords

Ag Secretary Tom Vilsack said he hopes reconciliation and infrastructure bills can be passed soon that include significant commitment to climate-smart agriculture, as well as funding for forestry, agricultural research and broadband expansion. He also continued pushing for changes in “stepped-up basis” as a way to pay for the packages, provisions that House Ways and Means Democrats opted to leave out this week. President Joe Biden’s plan proposes eliminating stepped-up basis for inherited assets greater than $1 million for individuals’ estates and $2 million for married couples’ estates while deferring capital gains tax liability on business assets as long as the business remains family operated.

“I am confident that what I’ve said is accurate, which is that the stepped-up basis presented by the president, in his plan, doesn’t impact 98% of farms in this country,” Vilsack said, adding that the existing exemptions would protect most farms from being subject to changes. He acknowledged that the Senate Finance Committee could add changes to stepped-up basis into the reconciliation bill although the likelihood is still unknown.

The ag sector has clamored for the release of USDA analysis on which Vilsack’s comments regarding the changing of capital gains taxation at death are based. USDA’s Economic Research Service dfinally released that analysis. The report abstract says: “The results suggest that of the estimated 32,174 family farm estates in 2021, 1.1% would owe capital gains taxes at death, 18.2% would not owe capital gains taxes at death but could have deferred tax liability if the farm assets do not remain family owned and operated, and 80.7% would have no change to their capital gains tax liability.

Of note, the report says, “The 18.2% of estates not taxed at death with carry-over basis on some farm assets accounted for 63.2% of estates’ value of production. In comparison, the 80.7% of estates that owed no tax at death and received stepped-up basis on all assets accounted for 34.6% of estates’ value of production. The remaining share of the value of production (2.1%) was estimated to be produced by the 1.1% of farm estates taxed at death that will have a carry-over basis on all farm assets.”

The report relies on USDA’s definition of a farm as “as any place that produced and sold—or normally would have produced and sold—at least $1,000 of agricultural products during a given year.” Family farms, specifically, are defined as “any farm where the majority of the business is owned by the principal operator—the person who is most responsible for making day-to-day decisions for the farm—and by individuals who are related to the principal operator.”

The analysis did not include information about operators who were not identified as the principal operator or the spouse of the principal operator—a segment that accounted for around 10% of farms in 2019. “Households associated with non-principal operators may also have a capital gains tax liability at death depending on the size of the assets and the ability to pass on their share of the operation to a family member who continues to operate the farm,” the report noted. The study included farms regardless of structure. It did not cover the tax implications for non-operator landlords who owned approximately a third of all farmland in 2014.

Paul Neiffer, CPA and principal at CliftonLarsonAllen LLP, commented, that USDA’s inclusion of any farmer with more than $1,000 of gross sales “jumped out at me.” He says, “The analysis really should be for those farmers who actually make a living primarily from farming. In that case, likely more than 90% of them would be affected since many of them would also not meet the family farm definition, at least based on current law.”

Neiffer continued, “Their analysis does show that at least 63% of the farms would owe a transfer tax, either during lifetime, at death or at some point in the future. They couch their terms in potentially deferring the tax but it will be paid at some point in the future, especially since there will be an IRS lien on all farm property which will result in most banks requiring the lien to be paid off.”

As noted above, the analysis also ignored land values by excluding non-operating landowners. The report essentially ignored landlords and of course land is where a substantial amount of the value is for farm country. “Once you start including land values, which they are ignoring, you’re talking huge numbers,” Neiffer says.