This year’s legislative session in Jefferson City was filled with discussion and debate on tax deductions and credits which affect Missouri’s businesses and the economy in which they operate. The Missouri Soybean Association (MSA) fosters awareness of needed law changes through a network of legislators, professionals and industry thought leaders throughout the state. And, many of these proposed changes would directly impact the bottom line for Missouri farmers and their families.
One proposal, with a far-reaching perspective, is the proposed capital gains exclusion from income for farmers selling land to beginning farmers and for leasing land to beginning farmers. By making an exclusion from taxable income, this provision not only incentivizes retiring landowners to look for local individuals as the future of Missouri agriculture, but it also gives the beginning farmer an edge in becoming owners of Missouri farmland. Working through the math with representatives and accountants, the capital gains exclusion creates roughly a $500 per acre tax savings for the seller, which is substantial enough to start the conversation of selling to a beginning farmer rather than to a highest bidder. A farmer can take advantage of this by selling land to a beginning farmer and paying no tax on the gain from the sale of the land.
Further, the definition of a beginning farmer needed to be broad enough to not inadvertently exclude young entrepreneurs who have had livestock or crops since an early age. Think tank-type discussions throughout the process helped make this proposal not only effective but also able to be utilized right away to make an impact on who owns Missouri farmland in the future.
Federal tax law favors those having capital gains by creating a lower tax rate on capital gains than on ordinary income. Missouri tax law has no lower rate on capital gains. Several other states in the Midwest have tax laws on their books that promote sales of farmland to younger farmers. Missouri had no such law.
Another example of forward thinking is working to get the Missouri Business Income Deduction available for farmers. In 2018, federal tax law implemented the Qualified Business Income Deduction where 20% of business income is excluded from being taxed. Missouri enacted a similar provision whereby a percentage of income is also excluded from Missouri taxation, starting at 5% and increasing over time, currently at 15% of income.
However, unlike the federal deduction, which is available to farm income, Missouri’s version of the deduction is for businesses but is not for farmers. MSA worked with legislatures and with tax professionals at our firm to insert into the legislative process a correction to this slight against farmers. This is only asking for a level playing field for Missouri agriculture.
To have an effective policy for Missouri agriculture, it takes a concerted effort that starts with the farmer. Seeking to understand how matters such as Missouri taxation of agricultural profits works by being engaged with, asking questions of, and having strategic conversations with accountants, legislators, local farm groups and statewide associations helps shape the future of Missouri agriculture.
UTILIZE FARM INCOME AVERAGING
Farm income averaging allows farm taxable income to be spread over four taxable years and is surprisingly an underutilized tax break for farmers. If your tax professional indicates an indifference to explaining how farm income averaging works, it should be a signal to you to press for an explanation from a professional who understands farming. You don’t have to be a “farmer” to use farm income averaging, you only must have some farm income.
FULLY CAPTURE BASIS FROM ALL INHERITED ASSETS
Almost all assets you inherit will carry a fair market value to you. In many cases, basis can be deducted or depreciated, saving you tens of thousands of tax dollars. In those times when farm assets transfer to the next generation due to a death in the family, get professional advice prior to filing any tax returns. The result could be a large cash savings to your operation through reduced income taxes.
UNDERSTAND FAMILY EMPLOYMENT
In a family farming operation, properly employing family members working in the operation and providing benefits to the family employees can result in tax- free cash to the family. Many benefits exist from hiring family employees, including utilizing standard deductions available to children, providing tax-deductible medical insurance and medical benefits, retirement plan contribution deductions and an increased Qualified Business Income Deduction, in some cases.
