It is important first to understand how farm households are divided based on the principal operator (PO) and gross cash farm income (GCFI). The USDA measures farm size using GCFI and breaks farms into four categories. According to the ERS, over 82% of farms are classified as small farms, nearly six percent are midsize, three percent are large scale, and almost three percent are nonfamily farms. 

• Small family farms (GCFI of less than $350,000)
  • Retirement farms: PO is retired from farming but still farms on a small scale. 
  • Off-farm occupation farms: PO has a different primary occupation than farming.
  • Family occupation farms: PO’s primary occupation is farming.
• Midsized family farms (GCFI between $350,000 and $999,999)
• Large-scale family farms (GCFI of $1,000,000 or higher)
  • Large farms: GCFI between $1,000,000 and $4,999,999
  • Very large farms: GCFI of $5,000,000 or higher
• Nonfamily farms: farms where any operator or individuals related to the operator do not own a majority of the business. 

The legal tax structure of a farm is also important to understand, as it determines whether a farm business is taxed through the federal income tax or the corporate tax. Farms organized as sole proprietorships, partnerships, and S corporations are subject to federal income taxes, while farms organized as C corporations are subject to corporate taxes. According to the ERS report, 89% of farms are organized as sole proprietorships, with approximately five percent organized as partnerships, one percent as S corporations, and two percent as C corporations. According to the 2022 Census of Agriculture, in Illinois, approximately 84% of farms are organized as a sole proprietorship, six percent are partnerships, and another six percent as corporations. This means that most farm households in the United States and Illinois would pay taxes through the income tax. 

The passage of the TCJA brought many changes to federal income taxes, most notably reducing and adjusting tax brackets, raising the standard deductions for single and married joint filers, altering the personal exemption, and limiting state and local tax deductions. With these changes expiring in 2025, most farm households will see increased tax liabilities. Farms with higher total incomes will see the largest increases, with very large farms potentially seeing an average increase of $27,588. In terms of percent increases, those farms with lower overall incomes would see the highest increases, according to the simulation. While retirement and low-sales farms would only pay $531 and $713 more in taxes, these figures represent a nearly seven and 11% increase in their tax liabilities. 

            Another change in the tax laws under the TCJA and ARPA was the child tax credit. The TCJA raised the credit to $2,000 per child, and ARPA created an additional credit of $1,000 for children between six and 17 years old and $1,600 for children under six. It is important to note that the ARPA credits were temporary, and the child tax credit will revert to $1,000 per child when the TCJA expires. If the TCJA provision expires, the number of farm households receiving a child tax credit would decrease. The most affected are off-farm occupation farms, midsized, and larger farms. The report found that larger farm households are more likely to have children but are less likely to receive a child tax credit refund under the TCJA and ARPA. Low and moderate-sales farms would see the greatest impact on the expiration and reduction of the child tax credit provisions. 

            The TCJA also changed the alternative minimum tax (AMT), which applies to individuals with high incomes and is used to limit the amount of deductions they can use. Fewer farm households were impacted because of the changes made to the AMT. The expiration of the changes to the AMT will see the number of farm households that owe increase, with larger farm households most impacted. On the flip side, the earned income tax credit (EITC) was first introduced to help ease the tax burden of low and middle-income taxpayers. EITC was expanded under ARPA, with the maximum credit limit increased to $1,502. The expiration of the expansion to the EITC has the greatest impact on retirement and low-sales farm households. 

            When looking at the combined impact of these sunsetting tax provisions under the TCJA and ARPA, farm households in the United States could see a nearly $9 billion increase in their total tax liability, with the expiring tax brackets and state and local deductions costing approximately $4.5 billion. The expiring child tax credit provisions from the TCJA and ARPA will increase total tax liabilities by almost $2 billion. 

This blog post explores the changes in federal income tax provisions for individuals and how they will impact farm households. With most farms in the United States and Illinois organized as sole proprietorships and partnerships, the changes in individual income taxes will affect the tax burden for those farm households. It is essential to consult with a tax professional to fully understand these changes' impact on your operation. Part two of this series will examine the expiring business and estate tax provisions and how they will impact farms. 

To read the USDA report in full, follow this link: https://www.ers.usda.gov/publications/pub-details/?pubid=108635.