Farmers and ranchers claiming a small business partnership will no longer get the taxfiling advantage currently available under existing tax law

Farmers and ranchers claiming a small business partnership will no longer get the tax-filing advantage currently available under existing tax law.

Hidden tax law threatens small business partnership options on the farm

Tax change will affect farmers and ranchers Objects to repeal of the tax-filing advantage

At a time when farm incomes are down, input costs are spiraling, and markets are weak, the last thing agriculture needs is another straw on the camel's back.

But since Washington lawmakers voted to withdraw small partnership tax simplification measures for small business — set to take place in 2018 — farmers and ranchers claiming a small business partnership will no longer get the tax-filing advantage currently available under existing tax law.

The small business partnership provision for agriculture has been an option to avoid having to file a Form 1065 partnership tax return. Instead, each business partner can claim income on their personal Form 1040 tax return.

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It was an exception to a more lengthy and complex tax filing requirement that most often required the assistance of a tax attorney or tax preparer familiar with the ins and outs of corporate partnerships, and that almost certainly led to burdensome fees for third party services.

The advantage, or filing exception currently allowed for small business partnerships, got its origin when Congress passed legislation in 1982 to simplify the tax reporting system for small business partners. To qualify for the option and to avoid more complex filing procedures and requirements, small business partners were limited to operations with 10 or fewer members  (husband and wife considered one member), and if those members were individuals or estates of individuals.


Neil Harl, Charles F. Curtiss Distinguished Professor in Agriculture and Life Sciences at Iowa State University and Emeritus Professor of Economics, knows a great deal about tax laws in general, and specifically about small business partnership tax-filing exception.

He was a member of an 11-person task force that helped draft the rule in the late 1970s. In addition to a law degree from the University of Iowa, he holds a Ph.D. in economics from Iowa State, and has authored a 15-volume treatise, Agricultural Law, and a two-volume treatise, the Farm Income Tax Manual. He has served on seven federal commissions, including a term as an advisor to the Commissioner of the Internal Revenue Service.

Harl says he takes exception not only to the repeal of the tax-filing advantage offered to farm and ranch small business partnerships, but more importantly the way it was done by Congress.

“One of the concerns I have is that it will be a disadvantage to a lot of small businesses, including many farmers and ranchers — but more importantly, the law was not included in the Tax Bill, but rather in the Bipartisan Budget Act of 2015, which gets little scrutiny by people looking for changes in taxes,” Harl told Farm Press.

 “This was introduced by a House member from Ohio on behalf of a group of tax industry individuals, such as attorneys and tax preparers, who were disgruntled over not getting the $2,000-$3,000 [per case] they could charge to do the more complicated tax returns for small business partnerships. It was neatly tucked away, hidden, in a budget bill until it became law.”


He said many farmers and ranchers are not even aware of the coming changes, since the new tax code won't become effective until 2018. That's when small partnership farming and ranching operations will be required to go back to the old form of filing additional forms and information that will be either too complex or too time-consuming for farm operators who are accustomed to preparing their own 1040 returns.

“This is not the way we should be making laws in a democratic society,” Harl says. “This is a major area that angers a lot of citizens, when they see people with enough money to pay campaign finance demands by people in public office and [in return] get just about whatever they want.”

Harl and others sympathetic to the difficulties posed for business and taxpayers at large when tax codes and laws are changed, say such revisions should only be made after being discussed openly, allowing time for public scrutiny and comment. Without transparency, they say, it is difficult to debate and discuss laws that are intentionally hidden in other bills and only made known after the fact.

“If these changes in tax codes and laws are to be done, ultimately they should be done the right way. They should only be done after discussions and hearings, after tax committees like House Ways and Means, Senate Finance, and Joint Tax Committees have looked at them, and after an appropriate period for public comment. I think this is just not the way to build confidence in our public officials. Hiding legislation to satisfy the needs of a few and penalizing thousands is not responsible government.”

What will happen in 2018 when this new change in small business partnership filing requirements will take effect? It depends on the response of taxpayers between now and then, Harl says. But it is appropriate, he says, that all agricultural producers and other small business partners who are able to take advantage of the streamlined tax filing exception allowed by current law contact their representatives and to make known their objections.

“The only way to stop this from happening is for this to go back through Congress,” he says. “The tax code changes authorized by the Bipartisan Budget Act of 2015 must be repealed by lawmakers. It's the only thing that will stop this from happening.”

Harl warns it will take a concerted effort by taxpayers and industry, including farm groups and other advocates of small business, to apply pressure and influence lawmakers, and to make their neighbors and business community aware of what is at stake.

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