Current tax laws create impediments for farmers who’d like to retire as well as for people who’d like to enter the profession: That’s the message that an NC State University senior lecturer brought to the U.S. House of Representative’s Committee on Agriculture last week.
Guido van der Hoeven, of the College of Agriculture and Life Sciences’ Department of Agricultural and Resource Economics, was one of five witnesses who spoke during the committee’s April 5 hearing on agriculture and tax reform. (See the video.)
Van der Hoeven is president of the Land-Grant University Tax Education Foundation, which publishes national income tax workbooks each year, and is co-chair of the National Farm Income Tax Extension Committee. He was invited to testify by Committee Chairman Michael Conaway of Texas.
A tale of two farmers
Focusing his oral presentation on the challenges faced by two farm families he has visited in the past few weeks in his role as NC State Extension specialist, van der Hoeven explained that both farmers – ages 68 and 70 – had deferred taxes over their lifetime and were now facing financial challenges.
Now that the 70-year-old understands the extent of his tax liability, he told van der Hoeven that he doesn’t know if he can afford to retire. To manage the tax bill, he is considering farming for another five years.
Large tax bills not only represent “a barrier to exit” but also a hurdle for entering farmers, van der Hoeven added. In the case of the person who wanted to buy the retiring farmer’s machinery, he was asked to make a large down payment that he wasn’t prepared to pay so that the selling farmer would have sufficient cash to pay the tax bill.
“Many exiting farm operators want to see the business that they have worked to create be kept together and passed to a new generation of farm operators,” van der Hoeven wrote in a statement accompanying his testimony. “Current law impacts this transfer and often creates impediments to both parties, and, therefore, these transfers do not occur.”
As van der Hoeven explained, “If the exiting farmer sells assets to a beginning farmer, he or she must recognize and pay income tax on the gain from that sale. If the exiting farmer gives the assets to the beginning farmer, the beginning farmers receive a carryover income tax basis in the assets and must recognize and pay tax on the donor’s unrealized gain upon a subsequent sale.
“By contrast,” he added, “if the exiting farmer holds on to the assets until he or she dies, the heir’s income tax basis in the assets are adjusted to the date-of-death value of the assets, and no one has to recognize and pay income tax on the difference between the exiting farmer’s basis and the date-of-death fair market value of the assets.”
To encourage farmers to transfer farm assets during their lifetimes rather than waiting to transfer them when they die, van der Hoeven proposed several changes to the tax code that he believes will make it easier for younger people to enter farming.
Proposed tax changes
In an interview after his testimony, van der Hoeven said the changes would help address an important national issue: The age of the average American farmer – now, 58 – has risen over the past 30 years, and fewer young people are entering the business.
Among the eight remedies van der Hoeven proposed was to allow for taxpayers to set aside funds in a tax-deferred account that a beneficiary can use for buying a farm or other business, just as they are able to set up tax-deferred accounts to save for their children’s college educations.
Van der Hoeven said his time on Capital Hill was “refreshing and hopeful” – a message he shared with his students upon his return. Committee members on both sides of the chamber displayed a collegiality not typically portrayed in the popular media, he said.
“This may be naïve, this may be idealistic, and this could be because I am a pointy-headed academic,” he said, “but it was a bipartisan experience that I had with the Ag Committee.”
Only time will tell how the House Ways and Means Committee ultimately addresses tax reform, van der Hoeven said, but the hearing was a positive step in the journey, one that will be recorded for posterity in the Congressional Record.