A stepped-up basis repeal impacts agricultural estate planning

                   A study commissioned to Ernst and Young by the Family Business Estate Tax Coalition (FBETC), including the American Farm Bureau Federation (AFBF), American Soybean Association (ASA) and the National Cattlemen’s Beef Association (NCBA) as contributors, shines light on the negative impact eliminating the stepped-up basis tax provision has to family farms and ranches, as well as jobs and the economy. 

                  “The Ernst and Young study sheds light on the facts we at NCBA – among others in the agricultural community – have long known,” says NCBA Senior Executive Director of Government Affairs Danielle Beck. “Simply put, the repeal of the stepped-up basis would have catastrophic impacts on the ability of farmers and ranchers to transfer their operations to the next generation.”

The elimination of the stepped-up basis in tax code was proposed by the Biden administration to realize capital gains tax revenue. 

Capital gains taxes

                  According to an article written by AFBF Economist John Newton and ASA Economist Scott Gerlt, capital gains taxes are based on the change in value which occurs when an asset, including livestock or land, is sold. Currently, the highest capital gains tax rate is 20 percent, and the basis is reset during intergenerational changes in asset ownership to reduce the amount of capital gains tax for farmers and ranchers. 

                  AFBF Economist Veronica Nigh says, “A long standing provision of U.S. tax law is that a capital gains tax is not imposed when assets are transferred at death to an heir. Furthermore, tax law allows the heir to increase their basis in the asset to fair market value without paying capital gains tax.” 

Generational transfer

                  In the study, Ernst and Young developed a theoretical scenario in which a family-owned cow/calf operation was purchased in 1990 for $2 million, and over the years improved and added assets to the operation. By 2025, the value of the farm had increased to $20 million. 

                  The owners’ heir inherited the operation, with an annual income of $1 million, in 2025 after the death of the owners. Without the stepped-up basis, the business’ heirs would owe a capital gains tax of $2.8 million, or 280 percent of the annual income, which could be a significant enough burden on the new owners they could be forced to sell. 

                   “Eliminating stepped-up basis would make passing the family farm to the next generation much more difficult when the capital gains taxes would exceed a farm’s net income in many cases and require years to pay off,” says AFBF President Zippy Duvall. “We urge lawmakers to leave stepped-up basis in tact to ensure farmers can continue feeding America’s families.”

Impacts to economy

                  The FBETC analysis shows the tax increase by a repealed stepped-up basis, either as a tax at death or in carryover, will also have negative impacts on family-owned businesses, U.S. gross domestic product (GDP) and in both short- and long-term job creation. 

                  “The elimination of stepped up-basis would increase taxes of course,” notes Nigh. “The increase in taxes makes each project a potential investor might complete all the more expensive, and this means there’s probably going to be a decline in investment.”

                  Nigh explains the study found the elimination of the stepped-up basis could lead to an immediate decline of 80,000 jobs each year over a span of 10 years, and would decrease jobs by 100,000 each year in the long-run. The study also found the elimination to cause a $10 billion decrease in GDP each year, leading to a 10-year deficit of $100 billion. 

                  Averi Hales is the editor of the Wyoming Livestock Roundup. Send comments on this article to roundup@wylr.net.