H.R. 1 (commonly called the One Big Beautiful Bill Act – OBBBA) included numerous provisions impacting agricultural operations (some positive, some negative). For today, we will focus on three.
Estate tax
The estate tax is imposed “on the transfer of the taxable estate of every decedent who is a citizen or resident of the United States.” The “taxable estate” is the gross estate (all property, real or personal, tangible or intangible, wherever situated) reduced by permitted deductions. Land values are generally included, unless tax-planning strategies have been utilized.
The 2017 Tax Cuts and Jobs Act temporarily raised the unified credit (estate and gift tax exemption amount) from $5 million to $10 million (plus inflation). That increase would have expired at the end of 2025 with the amount reverting to $5 million plus inflation. H.R. 1 raised the amount to $15 million with no stated expiration. H.R. 1 did not change the deceased spousal unused exclusion amount (DSUE) rules, which allow spouses to combine their exemption amounts (now totaling $30 million). Utilizing DSUE is generally called portability and has several requirements, including making an irrevocable election in a timely filed estate tax return for the predeceasing spouse’s estate.
For many, but not all, operations this means that income, capital gains and other taxes should be the focus of their planning rather than the estate tax, which may not apply if the taxable estate upon death will not exceed the increased exemption amount.
Qualified farmland income/capital gains tax payment plans
Capital gains taxes are a form of income tax imposed on “the gain from the sale or other disposition of property.” The calculation of the tax is impacted by your tax basis in the property, and some exchanges of property are considered nontaxable.
H.R. 1 created a payment-plan option regarding “the sale or exchange of qualified farmland property to a qualified farmer”:
“Qualified farmland property” means real property located in the U.S.:
- Which –
(I) has been used by the taxpayer as a farm for farming purposes, or
(II) leased by the taxpayer to a qualified farmer for farming purposes,
during substantially all of the 10-year period ending on the date of the qualified sale or exchange, and - Which is subject to a covenant or other legally enforceable restriction which prohibits the use of such property other than as a farm for farming purposes for any period before the date that is 10 years after the date of the sale or exchange.
The terms farm, farming purposes and qualified farmer are also defined.
The taxpayer may elect to pay the net tax liability – the increase in income tax caused by the farmland sale – in four equal annual installments, with the first payment due the year of the sale. Payments may be accelerated under certain circumstances (e.g., death, delinquency, etc.) and there are special rules for C corporations, S corporations and partnerships.
The restrictive covenant that must be applied to the land is a complicated legal tool for which you should seek legal counsel, and it must be included with your tax return for the tax year of the sale. It is important to note that this is not a exemption or exclusion from paying the applicable tax, but only a deferment (paying over time).
Qualified pass-through entities – farm bill programs and FSA payments
H.R. 1 implemented a change in Farm Service Agency (FSA) program eligibility that has been a Capitol Hill battle for many years – qualified pass-through entities. The following definition was added to the Food Security Act of 1985, which, in part, dictates payment eligibility for farm programs:
The term “qualified pass-through entity” means:
- A partnership (within the meaning of subchapter K of chapter 1 of the Internal Revenue Code of 1986);
- An S corporation (as defined in section 1361 of that Code);
- A limited liability company that does not affirmatively elect to be treated as a corporation; and
- A joint venture or general partnership.
Previously, use of certain entities – such as limited partnerships, LLCs, etc. – might cause an agricultural operation to lose payment eligibility or receive less payments, hence the prolific use of joint ventures and general partnerships instead of other entity options. H.R. 1 replaced prior limitations for joint ventures and general partnerships with the new qualified pass-through entities. Therefore, so long as your entity meets the definition and complies with all other payment eligibility rules, your operation may utilize LLCs and other entity forms in your planning without the previous negative impacts to program payment eligibility.
For an in-depth review of FSA programs, payment eligibility and other related topics, I would highly recommend reading “Paved With Good Intentions: Unintended Impacts Of Farm Bill Payment Limitations On Farm Risk Management And Farm Transitions.”
This article is provided for informational purposes only. Readers should consult their own professional advisers for specific advice tailored to their needs. Information contained in this article may be subject to change without notice.
References omitted but are available upon request by sending an email to the editor.
