Tax Reform Issue: Bill Could Subject Farm Rental Receipts to Self-Employment Taxes

DTN Ag Policy Editor Chris Clayton reported yesterday that, “The House tax-reform bill meant to lower taxes could lead to a self-employment tax hitting every landowner who leases land to a farmer and farmers who lease farmland to a family partnership.

“The tax bill would be 15.3% higher under a formula that makes 70% of rental income subject to self-employment taxes. Currently, rent is not subject to self-employment (SE) taxes.”

Mr. Clayton stated that, “So landlords and others with passive income might get a lower income-tax rate of 25%, but rental income would be subject to self-employment taxes. Self-employment taxes combine two areas: a 12.4% tax for Social Security and a 2.9% tax for Medicare.

“The House Ways and Means Committee started on Monday what is expected to be a weeklong process of debating and moving the tax-reform bill out of committee. The Senate Finance Committee will eventually release a bill as well. Senators have made it clear they will have some different provisions in their bill.”

The DTN update noted that, “According to a 2014 USDA survey, roughly 80% of farmland landlords, or about 1.85 million people, are non-operators. Nearly 1.1 million lease land as an individual while the rest are in partnerships, trusts, corporations or other structures. In 2014 when the survey was released, those 1.85 million non-farmer landlords also leased out more than 283 million acres of farm and ranch ground.”

Yesterday’s article also pointed out that, “Farmers who do those lease arrangements within families could choose to no longer do so because the tax advantages would be lost. Other farmer tenants could face the prospect of landlords passing that SE [self-employment] tax increase on to the cost of the farm ground they offer for lease. That would depend on how elastic or inelastic the current land market is, [Roger McEowen, an agricultural tax-law professor at Washburn University in Kansas] said.

“Older people could become more frustrated because they will be paying that self-employment tax knowing they will unlikely see any benefit out of it.

The situation is different for the sole-proprietor farmer who files a Schedule F, or for a general partner in a partnership. They will see a tax decrease because those farmers already pay that 15.3% self-employment tax. So sole proprietors would get a cut because they would now only pay self-employment taxes on 70% of their income rather than 100%, McEowen said.”

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