Proposed tax reform may have dire consequences for cattle producers
According to Nebraska cattle rancher and attorney Scott Peterson, tax reform legislation proposed in Congress may have serious consequences for cattle producers.
Peterson discussed critical elements of the legislation in the June 6 edition of the National Cattlemen’s Beef Association Beltway Beef podcast.
One concern for farmers and ranchers is the proposed removal of cash accounting. “Cattle producers use cash accounting basically to justify their income to their expenses on a year-to-year basis,” said Peterson.
He explained that agricultural producers typically use accrual accounting with their businesses.
“In accrual accounting, we don’t get to recognize the income until the inventory is dealt with, and we do that over time,” he commented. “We use it because we get to immediately expense items in the time in which we actually paid for them.”
Peterson noted the method allows producers to recognize income appropriately.
“It’s utilized in almost all agricultural businesses just because it’s a better mechanism, so we can actually show the expenses when they occur,” Peterson continued. “It allows us to continue to operate and income average over time.”
If producers weren’t able to use cash accounting, Peterson explained they would be required to carry notably higher loan rates.
“Right now, as we have a capital-intensive business, our loan rates are very high,” he said.
Removing the ability to use cash accounting would make it so producers are unable to make deductions over time, said Peterson.
“Not only would we have to borrow money to buy equipment, fertilizer, cattle and those things, we would have to borrow additional money to cover the tax cost of what would be a false tax cost,” he commented.
In today’s current markets, it is extremely challenging for young producers to get started in the cattle industry, added Peterson.
“It is very difficult because of the capital-intensive nature of the business,” he commented.
Peterson explained that the cost of land and interest on the land is a large portion of startup costs.
“The cost of that land and the cost of interest on that land is significant. So, to start a ranch today, to buy cattle and buy land will cost at least $5 million just to survive,” he stressed.
Peterson noted, “That’s buying enough land so we could run between 200 and 400 head of cattle.”
“One of the things we’re concerned with in the House blueprint is removing interest deductions,” said Peterson.
He explained that interest deductions are actual business expenses for producers, due to the capital intensiveness in the agricultural industry.
“For instance, when we look at the feedlots, for every animal that comes in, producers pay interest on their purchase cost, and they pay interest on their feed throughout the process,” he commented.
Peterson continued, “When we do a closeout at a feedlot, there’s an actual interest cost on every animal, and that’s a real business expense for our producers.”
According to Peterson, interest deductions have a large impact on young farmers and ranchers since a significant part of their purchases is land.
“When we look at the interest deductions on land costs, over 50 percent of the land cost is interest in those first few years of production,” he said.
Peterson continued, “If we get rid of that interest expense, we’ve basically put young producers in a bankruptcy situation because that business expense is real to them.”
He explained that interest expense is deducted from the young producer’s Schedule F before even reaching their 1040.
Peterson stressed that, if deductibility of interest was removed, it would have a significant negative impact on cattle producers.
“People would go broke because they’ve previously been losing money on cattle for the past 1.5 years, and that interest deduction is a real expense that comes off,” Peterson commented.
He concluded, “Those people have a tax rate right now of zero because of all of the losses. That’s just another negative to their balance sheet if they’re not able to deduct the actual expense.”
Emilee Gibb is editor of Wyoming Livestock Roundup and can be reached at firstname.lastname@example.org.