In August 2016, the IRS proposed a new regulation under Section 2704 of the Internal Revenue Code that could greatly affect farmers. This long-awaited proposal would take away the ability for family-owned farming businesses to apply the valuation discounts they have used for so long. The change would cause a significant tax hit, discouraging further economic growth of this industry.
For many years, farmers could reduce the value of their taxable estates by placing the land or assets in family-owned business interests (such as corporations, partnerships and LLCs). The business value was then reduced by claiming a discount due to lack of full control. If you aren’t familiar with a Discount for Lack of Control (DLOC), it is a method to reduce or deduct from the equity interest in a business to reflect the absence of some or all of the powers of control. Thus, it reduces the value of the ownership interests and, in turn, reduces the value of the person’s estate.
Under current tax law, this discount dramatically reduces the amount a taxpayer may owe, especially given the current 40 percent effective tax rate for any estate valued over $5.45 million. But with the new regulations the IRS intends to set forth, farmers who have land valued over $5.45 million would have some very high estate taxes to pay.
The IRS has received a lot of pushback on this proposed change since it first came to light in August. Two separate letters were written to the U.S. Treasury Secretary noting the opposition to the new estate tax regulations. The concern noted the elimination or large reduction in the DLOC, which could discourage families from continuing to operate their businesses.
The overarching fear is that without this reduction, families will not be able to afford their high tax rates. This could result in a lack of desire to continue to operate their businesses or pass them on to future generations. Many family farmers could decide to end their businesses, meaning a lack of agriculture and farming operations that keep food on our tables.
As such though, the Treasury Department and the White House were pleased with the proposal, noting that the proposed regulation “closes a tax loophole” that allows people to avoid paying their share in estate taxes. Although the concern for family farmers is real, the process for finalizing this particular regulation could last a few years.
Even so, it’s important to pay attention to the ever-changing laws of the nation we live in and be ready to meet with your estate planning attorney to most effectively protect your estate. Especially if you’re a farmer with a high value of land.