The Tax Cuts and Jobs Act (TCJA) of 2017 introduced several tax provisions that provided significant benefits to U.S. farmers, including soybean producers in Illinois. However, many of these provisions are set to expire at the end of 2025, potentially raising tax liabilities and complicating farm succession planning. Understanding the impact of these changes—particularly the estate tax, Section 199A deductions, and the stepped-up basis rule—is crucial for Illinois farmers who aim to safeguard their financial future and secure their ability to continue farming.

Estate Tax Implications

One of the most impactful provisions of the TCJA for farmers was the temporary doubling of the federal estate tax exemption. In 2025, the exemption will increase to approximately $13.99 million per individual, but this will revert to pre-TCJA levels in 2026, estimated to be around $7 million per individual, adjusted for inflation. This rollback will subject more farm estates to federal estate tax, placing a significant financial burden on farm families.

Illinois also has its own estate tax with an exemption threshold of $4 million—substantially lower than the federal exemption. This means that even if a farm estate isn’t subject to federal estate tax, it could still face Illinois estate taxes. Recent legislative efforts, such as HB2368, aim to extend the estate tax threshold and reform tax provisions, potentially reducing the burden on farmers. However, unless this bill passes, many Illinois farm families might be forced to sell land or equipment to cover estate tax liabilities.

The consequences of a reduced estate tax exemption could be severe. Illinois soybean farmers often operate on land that has appreciated significantly in value over generations, making their estates vulnerable to taxation, even if their cash flow remains modest. Without careful planning, a reduced exemption could force heirs to sell farmland to pay estate taxes, disrupting multi-generational farm operations.

Section 199A Deduction and Income Tax Changes

The Section 199A deduction, also known as the qualified business income (QBI) deduction, allows pass-through entities— such as sole proprietorships, partnerships, and S corporations—to deduct up to 20% of their qualified business income. This deduction has been a valuable source of tax relief for farmers, reducing their effective tax rates and allowing them to reinvest in their operations.

However, with Section 199A set to expire in 2025, many farmers will face higher taxable income and, consequently, higher federal tax liabilities. This could be particularly challenging for small and mid-sized farms operating under passthrough structures. Without the deduction, these farms will need to explore other tax-planning strategies to mitigate the increased tax burden.

In addition, individual tax rate reductions implemented under the TCJA will expire, reverting to higher pre-2018 rates. This could further increase tax burdens for farm families who file jointly or as sole proprietors, reducing available capital for investment and expansion.

Stepped-Up Basis and Capital Gains Taxes

The stepped-up basis provision plays a crucial role for farm families seeking to transfer land and assets to the next generation. This rule allows heirs to reset the tax basis of inherited assets to their fair market value at the time of the original owner’s death, minimizing capital gains taxes if the assets are later sold.

Although the stepped-up basis is not explicitly set to change with the expiration of the TCJA, it has been the subject of ongoing debate in Congress. Some lawmakers view changes to the stepped-up basis as a potential source of funding for other legislation. Any future attempts to alter or eliminate this provision could impose a significant tax burden on heirs, potentially forcing them to sell inherited farmland to cover capital gains taxes. This would further jeopardize the continuity of family farming operations in Illinois and across the nation.

Impact on Illinois Soybean Farmers

The expiration of these TCJA provisions will have far-reaching consequences for Illinois soybean farmers, including:

1. Higher Estate Taxes: More farm estates will become taxable at both federal and state levels, placing additional financial pressure on families inheriting farmland.
2. Increased Income Taxes: The expiration of the Section 199A deduction will increase taxable income for many farmers, reducing profitability.
3. Uncertainty in Farm Succession: Changes in the tax code will complicate estate and succession planning, making it harder for farm families to pass operations to the next generation.
4. Potential Land Sales: Higher taxes may force some farmers to sell portions of their land or assets, reducing farm size and potentially losing family-owned farms to larger corporate operations.

To mitigate these impending tax increases and protect the future of their farms, Illinois Soybean Growers is working with state and federal legislators to advocate for policies that ensure farmers can continue working and thriving in Illinois.

The expiration of key TCJA provisions poses a significant challenge to Illinois soybean farmers, threatening their financial stability and their ability to pass farms down to future generations. By proactively addressing these changes through careful estate planning, tax mitigation strategies and legislative advocacy, farmers can protect their operations and preserve their freedom to farm. As movement on these provisions approaches, staying informed and taking early action will be essential to ensuring the long-term viability of family-owned farms in Illinois.