Tax Troubles
On the tax front, NCBA prioritizes preservation of stepped-up basis.
“Folks must smell somethin’ funny,” said North Dakota rancher and vice chairman of the National Cattlemen’s Beef Association (NCBA) Tax and Credit Committee. Dan Rorvig was commenting on the near-record attendance for that policy committee’s meeting hosted during the 2021 Cattle Industry Convention in Nashville, Tenn. Indeed, the filled room illustrated a shared concern over proposed income and estate tax changes and their effects on farm and ranch operations.
Attendees voiced concern over proposed tax increases, including those associated with the Sensible Taxation and Equity Promotion (STEP) Act introduced by Maryland Democratic Senator Chris Van Hollen. If enacted, the legislation would fundamentally alter the income-tax environment for estate planning. It would eliminate the step up in the tax basis of a decedent’s assets at death,
- triggering capital gains tax on unrealized appreciation of assets whenever transferred by gift and at death;
- limiting exemptions and exclusions, including a $1,000,000 lifetime exemption, from capital gains tax on unrealized appreciation of assets transferred by gift or death; and
- by taxing unrealized appreciation of trust assets every 21 years.
“An estimated 98% of U.S. family farms and ranches would face higher taxes due to the STEP Act,” said Danielle Beck, NCBA senior executive director for government affairs and lead lobbyist for matters related to taxation.
While there is plenty to keep her and other staffers busy, Beck said the preservation of stepped-up basis is a priority for NCBA.
Beck explained that a long-standing provision of U.S. tax law, established by the Revenue Act of 1921, ensures that capital gains tax is not imposed when assets are passed to family members after the owner’s death. A step up in basis adjusts the value or “cost basis” of inherited assets to fair market value. This eliminates the capital gain that occurred between the original purchase of the asset and the heir’s acquisition, reducing the heir’s tax liability.
The proposed legislation repeals stepped-up basis for gains in excess of $1 million, or $2.5 million per couple when combined with existing real-estate exemptions. It retains the decedent’s tax basis rather than stepping up to fair market value. Beck said that could impose a tax on a lifetime of accumulated gains at the time of death.
To demonstrate the ramifications, Beck cited an example involving a 15,000-acre Nebraska Sandhills ranch purchased by a family in 1990 for $2 million. Since then, the family operation has expanded its herd and purchased additional grazing land costing $4 million. By 2025, the operation has a value of $20 million with annual income of $1 million. Under a tax at death, there would be an immediate capital gains tax of $2.8 million, calculated at 20% of $14 million (the difference between its 2025 value of $20 million and its total purchase price of $6 million).
“The result is that the heirs owe a one-time payment that is 280 times the ranch’s annual income,” said Beck, emphasizing again that NCBA will work to preserve stepped-up basis. On a positive note, she reported, each and every Republican in the Senate has expressed opposition to its repeal.
Beck speculated that proponents of higher taxes on agricultural operations have not considered the likely consequences. Facing overwhelming tax burdens, farm and ranch owners may be forced to sell out, which could promote conversion of more ag land to other uses and a loss of grasslands and open space. That would appear harmful to the administration’s stated conservation goals and detrimental to the environment.
Editor’s note: Troy Smith is a cattleman and freelance writer from Sargent, Neb. Lead photo from Getty Images.
