Posted: Wednesday, December 05, 2012 10:10 AM
By MATEUSZ PERKOWSKI
Fears about the "fiscal cliff" triggering higher tax rates have farmers rushing to transfer property to heirs and complete other transactions before the end of 2012, experts say.
Estate and gift taxes are scheduled to increase with the expiration of tax rates enacted under the Bush administration, speeding up the succession plans of growers, according to ag accountants.
"Some people are going to make gifts they normally wouldn't have until later," said Kerry Arritt, an accountant in Burley, Idaho. "It will cost their heirs a few million dollars if they wait."
The "fiscal cliff" refers to mandatory tax hikes and budget cuts that kick in starting in 2013, which could send the U.S. back into recession unless Congress can compromise on fiscal policy before then.
"You feel like you can't plan. There's no stability. That's not a healthy economic environment," said Terry Kuenzi, an accountant in Salem, Ore.
Currently, estate taxes are set at 35 percent on property in excess of $5 million, said Tonk Fischer, an accountant in Salem. Next year, the rate may rise to 55 percent on property in excess of $1 million unless Congress agrees on a new estate tax structure.
Farmers who want to transfer their interests in land, businesses and other property to their descendants are facing a short time frame as well as a shortage of lawyers and accountants, he said.
Such gifts are generally much more complex than simply writing a check -- especially if growers want to give their heirs the value of a corporate entity without signing away control over it, Fischer said.
Such sophisticated agreements require specialized attorneys who are already swamped with work as 2012 draws to a close, he said. "This year, more than ever, you need someone who is on top of the game."
Federal capital gains taxes are also expected to increase from 15 percent to 20 percent on income of more than $250,000, and the Obama administration is pushing for an even higher rate of 30 percent, Fischer said.
On top of that, there will be a 3.8 percent surcharge on capital gains, dividends and rent income associated with the new federal health care law passed in 2010, he said.
Landowners who were already contemplating selling their property are trying to get the transactions done this year to get taxed on capital gains at the 2012 level, said Arritt.
"They're certainly not going to get better than these rates," he said.
Generally, growers are more likely to take advantage of the 2012 tax rates by giving property to heirs rather than trying to quickly sell out and exit the industry altogether, said Stewart Hayes, an accountant in Salem.
"A lot of farmers are in for the long haul," he said.
Farmers and other business owners are wary of hiring more employees, expanding their operations or making investments due to the complete lack of clarity on future tax rules, Hayes said.
"Any time you have uncertainty, it creates paralysis," he said.
At the same time, the current tax rules create an incentive to buy equipment in a rush.
In 2012, farmers are able to deduct up to $139,000 spent on machinery from their taxable income in the first year of purchase, but that amount falls to $25,000 in 2013, said Fischer.
Farms that are structured as "C" corporations also have an incentive to hurry paying out dividends to shareholders. While that income is currently taxed at the federal capital gains rate of 15 percent, next year it's scheduled to be taxed as regular income at a rate of up to 43.4 percent, he said.
Since tax rates are likely to be higher next year, farmers may also want to think about "accelerating" their income, said Kuenzi.
Such acceleration is usually "anathema" in tax planning, but it may make sense in 2012 to ensure that farmers are taxed at this year's lower levels, he said. For example, a farmer may arrange to have an elevator or another buyer pay for his crop before the end of December, rather than early next year.
Even so, Kuenzi said farmers shouldn't overdo this strategy, as it could stifle their business operations in the coming year.
"You could catch yourself short of cash," he said.