Business and Financial

Written by AnnaMarie Poole, Law Fellow, National Agricultural Law Center 

Background Info

In 2017, the Tax Cuts and Jobs Act substantially raised the federal lifetime gift and estate tax exemptions, nearly doubling the previous limits.  As of 2024, individuals can transfer up to $13.61 million, and married couples up to $27.22 million, without facing federal estate tax.  This increased exemption has provided significant tax relief by allowing larger portions of estates to be passed on tax-free.  However, this benefit is temporary and is scheduled to end on December 31, 2025.  After this date, the exemption will revert to the 2017 level of $5.49 million, adjusted for inflation¹, which would reduce the amount that can be transferred tax-free in one’s estate. 

The estate tax exemption was raised in hopes of reducing the financial burden on higher wealth families, many of whom argued that the previous exemption levels led to “double taxation” on already-taxed assets, which harmed family-owned businesses and farms.  Also, by reducing estate tax liability by raising the exemption, it was hoped that people benefitting from the higher exemption would invest more of their wealth rather than redirect it toward complicated estate planning or tax-avoidance strategies.  The argument was this would help stimulate the economy. 

Opinions vary widely on what will happen to the estate tax exemption after 2025.  Some believe that Congress will extend the current higher exemption limits, which would keep the thresholds at or near the 2024 levels to continue providing tax relief.  Others expect the exemption to revert to the pre-2017 level, adjusted for inflation, which would result in a significantly lower threshold that will subject more estates to federal taxes.  Some predict a compromise, with the exemption being set somewhere between the current amount and the original amount, which would allow for a middle-ground approach that would balance tax revenue needs with estate planning concerns.  Finally, some propose lowering the exemption even further than the 2017 level and increasing tax rates.  Let’s look at each of these scenarios.

Option #1: Extend the Current Limit 

One prevailing thought is to extend the estate tax exemption due to its minimal contribution to overall federal revenue and its limited impact on reducing deficits.  Over the past 50 years, the estate tax has consistently accounted for less than 3% of total federal revenues.  In 2020, it raised just $17.6 billion out of $3.5 trillion in federal revenue, enough to cover only about a day’s worth of federal spending.  Given its relatively small role in funding government operations, many argue that the economic benefits of preserving wealth, protecting family-owned farms and businesses, and encouraging investment outweigh the limited revenue gains from allowing the exemption to expire.  This perspective suggests that maintaining the higher exemption would continue to promote economic stability without significantly affecting the federal budget.

Option #2: Revert to Original Limit

Historically, the estate tax has been used as a tool to prevent the excessive concentration of wealth and political power.  However, due to recent changes, only about 0.2% of estates are currently taxed, and the average tax rate on inherited wealth is just 2%.  Proponents of a lower exemption argue that reverting to the original exemption level would restore the estate tax’s role in curbing wealth inequality and funding public services.  Additionally, with an estimated $80 trillion in wealth set to be transferred from baby boomers to their heirs in the next two decades, a lower exemption could ensure that a larger portion of these inheritances is taxed. 

Option #3: Middle Ground

Another potential solution for estate tax reform could involve finding a middle-ground exemption level that lies between the current higher threshold of $13.61 million per person and the previous lower amount of $5.49 million, adjusted for inflation.  This would allow for more moderate estates to pass on assets without facing significant tax burdens while allowing larger estates to still contribute to public revenues.  Adjusting the exemption this way could protect smaller inheritances while ensuring fair contributions from estates of higher value.

Another middle-ground option would be to maintain the current exemption of $13.61 million per person but introduce a slightly increased tax rate on any amount exceeding this threshold.  Currently, estates over the exemptions are taxed at a rate between 18% to 40%.  By raising the tax rate but keeping the exemption, there would still be protections for most estates but those exceeding the exemption contribute a bit more to the tax system.  By making this adjustment, the policy could protect inheritances and generate necessary government revenue.  

Option #4: Lower the Original Limit

Another option is to reduce the estate tax exemption to an amount lower than the 2017 level and/or increase the estate tax rates.  An example of this approach is found in the American Housing and Economic Mobility Act of 2024, introduced in the Senate by Elizabeth Warren (D-MA) and in the House by Emanuel Cleaver (D-MO).  The bill outlines various affordable housing initiatives aimed at lowering costs for renters and buyers, while proposing modifications to estate and gift taxes to fund these measures.  Some proposed modifications to estate and gift taxes include:

• Lower the estate tax exemption to the 2009 amount of $3,500,000
• Replace the current estate tax rate of 40% with progressive rates
  • Tax rate of 55% for estates valued between $3,500,000 and $13,000,000
  • Tax rate of 60% for estates valued between $13,000,000 and $93,000,000
  • Tax rate of 65% for estates over $93,00,000
  • Additional 10% tax for estates over $1 billion 
• Reduce the annual gift tax exclusion from $18,000 to $10,000

While this type of legislation seems unlikely to pass Congress, there is a vocal minority that would like to see estate tax exemptions significantly reduced.

Who Can Make Federal Tax Law Changes?

The President does not have the authority to unilaterally change estate tax exemptions or make permanent adjustments to the tax system; those decisions are made by Congress. While the President can propose or advocate for specific tax policies, it is Congress that drafts, debates, and enacts tax legislation. As the federal estate tax provisions are set to expire in 2025, any adjustments to exemption levels or tax rates will require congressional approval. Lawmakers may choose to extend the current exemption, revert to previous thresholds, reach a compromise, or adopt a new approach. However, while the President can influence this process, direct control remains with Congress.

What This Means For You

As of now, it is impossible to know what will come on January 1, 2026.  However, it is not too late to utilize the current estate and gift tax limits.  In the upcoming year here are some things you should consider:

1. Gifting: Gifting can be an effective way of reducing estate tax liability but there are many tax and estate planning implications.  For a detailed discussion of gifting, see the Gifting To Reduce Federal Estate Taxes bulletin available here.
2. Consulting with an Estate Planning Attorney: An estate planning attorney can help set up the best plan for you and potentially utilize the current exemptions while they are still available. 
3. Reviewing Your Current Plan: You should make sure your current estate plan reflects your goals and takes advantage of the current higher exemption before it potentially decreases.  
4. Staying Informed: As the tax laws potentially change in the upcoming year, you should stay informed about issues that could impact your estate plan and your family’s finances. 

¹ The adjusted for inflation exemption is expected to be between $7 million and $7.5 million.

One thing we're not short on in agriculture today is the opportunity to engage in carbon sequestration programs. Many programs are available that offer to pay farmers and landowners for adopting practices that sequester carbon dioxide to keep the pollutant out of the atmosphere.  The practice aims to reduce greenhouse gas (GHG) emissions, as carbon dioxide is a significant contributor to GHG.  Farming practices that sequester carbon include using cover crops, adopting no-till, and planting trees. 

If you're considering a carbon sequestration or carbon credit program, what do you need to know about carbon sequestration?  An upcoming program offered by OSU Extension's Energy Outreach Program will offer insight into carbon sequestration. Join us on October 29, 2024 at 8 a.m. for a webinar on "Carbon Sequestration for the Farmer and Landowner" and hear from these three panelists:

• Michael Estadt, Assistant Professor & Extension Educator, Pickaway County
• Peggy Kirk Hall, Attorney & Director, Agricultural & Resource Law Program
• John Porter, Outreach & Partnership Liaison,Truterra, LLC

The panel will highlight important issues and considerations for farmers and landowners interested in carbon sequestration. Pre-registration is not necessary; simply join the webinar through this link:  go.osu.edu/carbon2024.

Contact Dan Lima at lima.19@osu.edu or call the OSU Extension office in Belmont Co. (740) 695-1455 for more information. 

Written by Tyler Zimpfer, NALC Law Fellow with the OSU Agricultural & Resource Law Program

The Corporate Transparency Act (“CTA”), enacted in 2021, requires “reporting companies” to file documents with the federal government indicating beneficial ownership information (BOI) for the business. Earlier this year, the U.S. Department of the Treasury’s Financial Crimes Enforcement Network (FinCEN) began accepting BOI filings from certain companies doing business in the United States. While reporting has begun, several legal disputes have sprung up around the country challenging the constitutionality and enforcement of the CTA. Despite the ongoing litigation, however, the initial filing deadline of January 1, 2025 remains in effect for businesses subject to the CTA.

Recent litigation challenging the CTA

On March 1, 2024, a U.S. District Court in Alabama ruled that the CTA exceeded Congress’ enumerated powers and therefore was unconstitutional. The court held that “the CTA exceeds the Constitution’s limits on the legislative branch and lacks a sufficient nexus to any enumerated powers to be necessary or proper means of achieving Congress’ policy goals.” Specifically, the court concluded that Congress exceeded its foreign affairs, taxing, and commerce powers. Interestingly, the court did not decide on the arguments that the CTA also violates the First, Fourth, and Fifth Amendments to the U.S. Constitution.

The court prevented enforcement of the CTA against only the specific plaintiffs in the case – the National Small Business Association (NSBA) and one of its individual members. While NSBA members currently avoid any reporting requirements, CTA compliance is still required for all other companies. Therefore, the injunction imposed by the court lacks a significant, practical impact for all other businesses for the time being.  

The United States has appealed the case, but most experts are not expecting a decision from the federal Court of Appeals for the Eleventh Circuit before the January1, 2025 deadline. When a decision is released, the losing party will likely appeal to the United States Supreme Court, dragging a final determination out even further.

Six other lawsuits have been filed in other federal district courts around the country, each expecting to last longer than the upcoming filing deadline. Long story short, the legal saga of challenges to the CTA is likely to continue for the foreseeable future.

Click here to read the recent U.S. District Court opinion from Alabama.

What the CTA requires

Several key terms of the CTA explain which companies the law affects and what a company must report by January 1, 2025:  

• “Reporting companies” subject to the CTA includes any domestic or foreign corporation, limited liability company, or any other entity that is formed or registered to do business in a U.S. state by filing a document with the secretary of state or other similar office. Several exceptions exist for those industries already subject to government oversight.
• A “reporting company” must disclose certain information about the company and its “beneficial owners.” The reporting information includes the full legal name and the IRS taxpayer identification number of the company.  BOI includes full legal name, address, and either an image of a U.S. passport, driver’s license, or other identification document issued by a state, local government, or tribe of each "beneficial owner."
• A “beneficial owner” is any individual who, directly or indirectly, exercises substantial control over the reporting company or owns or controls at least 25% of the ownership interests of a reporting company. There is no limit to how many beneficial owners a company may have.

To read specifics about the mechanics and submission guidelines of the CTA, please see our law bulletin, The Corporate Transparency Act:  Reporting Requirements, published earlier this year.

What does the CTA mean for farming entities in Ohio?

Many farming entities should be uniquely aware of the new BOI reporting obligations of the CTA. The CTA does not have specific industry exemptions for agriculture but takes a broad sweep at any entity that may be formed as a shell company. However, notable exceptions to the mandates of the CTA that affect farming entities include sole proprietorships and  general partnerships, which are exempt from CTA because they are not required  to register with Ohio’s Secretary of State.

Farming entities classified as "reporting companies," such as most farm limited liability companies (LLCs), are required to report relatively straightforward ownership information. However, gathering the necessary details, like driver's licenses or other forms of identification, can be time-consuming.  A scenario to take note of arises when an individual, despite owning only a small percentage of the company, is responsible for making many of the key short- and long-term decisions. This often occurs when management is passed to the next generation, while the older generation retains the majority of ownership. Under the Corporate Transparency Act (CTA), an individual who exercises significant management control must submit beneficial ownership information to FinCEN, even if their ownership stake is relatively small.

Additionally, any BOI updates such as a son or daughter being legally included in ownership of the farm’s assets or a beneficial owner's change of address must be reported within 30 days of the change. Forgetting to timely update the government may result in significant penalties for the company or a beneficial owner.

Moving forward

Farming entities that qualify as reporting companies should still expect to file information with FinCEN by January 1, 2025 as required by the CTA. Less than 10% of qualifying entities have filed with FinCEN so far, suggesting a delay in reporting or uncertainty regarding the District Court’s ruling in Alabama. Depending on current pending litigation, the CTA’s mandates may be adjusted or eliminated. Bills introduced in the U.S. House of Representatives and the U.S. Senate have also been proposed to modify or repeal the CTA, but no significant action has occurred on the proposals.

As litigation and legislation proceed, updates on the cases and bills will be forthcoming. In the meantime, farming entities should work with their attorneys, accountants, and other professionals knowledgeable of the new CTA obligations to meet the initial and future reporting requirements of the CTA.

In our last blog post, we explored how an LLC affects liability when owning machinery. However, liability isn’t the only consideration when evaluating the benefits of an LLC for your machinery. In this article, we'll focus on the tax implications of establishing a machinery LLC. As with most legal and tax strategies, there are both advantages and disadvantages to weigh before making a decision.

Section 179 Deductions

Farmers often use Section 179 to immediately expense the purchase of machinery rather than taking depreciation over a number of years.  If the machinery is used in the farming operation, Section 179 can be taken regardless of whether the machinery is owned individually or in a business entity.  However, Section 179 may not be available to retired farmers who still own machinery.

A common farm transition plan is for the retiring farmer to continue to own the machinery and lease it to the next generation farmer.  This leasing strategy avoids a sale of the machinery that would result in significant income taxes.  Leasing also helps the next generation’s cash flow.  However, a challenge with this strategy is that Section 179 expensing is not available for individuals who lease their machinery.  Consider the following example:

Mom and Dad decide to retire from farming and transition their operation to Daughter.  To avoid significant taxes on a sale and to help Daughter cash flow her farming operation, Mom and Dad continue to own the machinery and lease to Daughter.  If Mom and Dad purchase new machinery to add to their inventory, they will likely not be eligible for Section 179 expensing.

Using an LLC can allow for Section 179 eligibility because business entities who lease machinery are eligible for Section 179.  Let’s continue the example:

Mom and Dad set up an LLC and transfer their machinery to the LLC.  This new entity leases the machinery to Daughter.  If the LLC buys new machinery, the newly purchased machinery will likely be eligible for Section 179.

As the examples illustrate, using an LLC can be an effective strategy to maintain Section 179 eligibility for farmers who may have retired but maintained ownership of the farm machinery.

Reducing Self-Employment Tax

Leasing personal property, including farm machinery, generally results in self-employment tax, unless the machinery is leased along with real estate. One potential strategy to mitigate self-employment tax is to establish an LLC taxed as an S-Corporation and contribute the machinery to the LLC. In theory, some of the rental income is distributed to the owners without being subject to self-employment tax.  However, this strategy carries several risks.

The first major risk is the loss of a stepped-up tax basis upon the owner's death. When machinery is owned by an individual or by an entity taxed as a partnership, heirs may receive a stepped-up tax basis on the machinery, allowing them to re-depreciate or sell the equipment with little to no taxable gain. When machinery is held by a corporation, the stepped-up basis only applies to the ownership interest, not the machinery.  Let’s explain this concept by continuing the previous example:

Mom and Dad’s LLC holds $1,000,000 of machinery and is owned in equal shares.  They decide to tax their LLC as a partnership.   If Dad dies, his estate can either receive a $500,000 stepped-up basis on his ownership interest or the machinery in the LLC will receive a stepped-up basis of $500,000.  Mom, as the executor, elects to take the stepped-up basis on the machinery.  Mom now has $500,000 of additional tax basis in the LLC that can be depreciated offsetting $500,000 of income.

Conversely, Mom and Dad decided to tax their LLC as an S-Corporation.  Dad’s estate will only receive a stepped-up basis on his shares of stock.  Mom cannot depreciate the stock.  The stepped-up basis will only help Mom if she sells the stock, which is unlikely.

The stepped-up basis upon the death of an owner can be a huge financial windfall to the surviving spouse or heirs.  A loss of stepped-up basis on the inside assets of an entity taxed as a corporation should be taken into consideration when deciding upon the tax structure of a business entity that will hold machinery.

Another downside of holding leased machinery in an S-Corporation is the potential passive income tax. If more than 25% of the S-Corporation’s total income comes from passive activities, including machinery leasing, the corporation may face a tax on its net passive income. If this passive income exceeds 25% for three consecutive years, the S-Corporation risks losing its status and may be forced to convert to a C-Corporation, which could have more complex tax consequences.

Beware of Debt on the Machinery

Normally, contributing machinery to an LLC does not trigger any tax.  However, there is an exception when the debt on the machinery exceeds the tax basis.  In this circumstance, the IRS may treat the excess amount as a gain for the individual transferring the asset.  This gain is subject to income tax and can create an unexpected tax liability for the owner of the machinery.  Consider the following example:

Mom and Dad own a tractor that has a $20,000 tax basis.  They have $50,000 of debt on the tractor.  They contribute the tractor to their LLC.  When their accountant prepares their tax return the following year, the accountant informs Mom and Dad that they owe income tax on the $30,000 difference between the debt and tax basis.

Before contributing machinery to an LLC, be sure to consult with your tax advisor to be sure that there will be no unexpected tax liabilities.

Importance of a Written Lease

No matter which entity or tax structure you choose, it’s important to have a written lease for your machinery. A formal written agreement clearly outlines the responsibilities of both the lessor and lessee, helping to prevent misunderstandings or disputes down the road.  A written lease also reinforces the legitimacy of the arrangement as a formal business transaction. Without a proper lease, the IRS might scrutinize the leasing arrangement, potentially treating it as a disguised sale or disallowing certain tax benefits, such as Section 179 deductions. To avoid these issues, always use a comprehensive, well-drafted lease for machinery leasing arrangements.

Seek Legal and Tax Advice

Using an LLC to hold farm machinery can provide tax benefits but is also fraught with potential pitfalls.  Be sure to consult with your legal and tax advisor before establishing an LLC and transferring your machinery to the LLC.  A careful analysis of the advantages and disadvantages of an LLC and its tax structure must be done to determine the best strategy to pursue.