Tax Season Prep and Ranch Planning with Roger McEowen

April is quickly approaching and that means we are probably all spending a little time preparing for tax season. While the Angus Beef Bulletin team has devoted an episode or two to the One Big Beautiful Bill Act previously, we’re taking the opportunity to dive deeper into what effect this bill will have on taxes for farmers and ranchers. 

On this episode, our host Chelsea Good sat down with Roger McEowen, professor of agricultural law and taxation at Washburn University School of Law in Topeka, Kan., to discuss the One Big Beautiful Bill Act, its tax implications, a little something called hobby loss rules, planning for transition and taxes down the line, and more. 

Thank you to Superior Livestock Auctions for their sponsorship of this episode.

Additional resources: 

• The One Big Beautiful Bill with Chelsea Good
• The Estate Planning Stuff You Need with Shannon Ferrell
• Policy Matters

Find more information to make Angus work for you in the Angus Beef Bulletin and ABB EXTRA. Make sure you're subscribed! Sign up here to the print Angus Beef Bulletin and the digital Angus Beef Bulletin EXTRA. Have questions or comments? We'd love to hear from you! Contact our team at abbeditorial@angus.org. 

Transcript

Host Lynsey McAnally (00:05):
Angus at Work, a podcast for the profit-minded cattleman. Brought to you by the Angus Beef Bulletin, we have news and information on health, nutrition, marketing, genetics and management. So let’s get to work, shall we?

Hello and welcome back to Angus at Work! April is quickly approaching, and that means we're probably all spending a little time preparing for tax season. While we've devoted an episode or two to the One Big Beautiful Bill previously, today we're diving deep into what effect this bill will have on taxes for farmers and ranchers.

I'm Lynsey McAnally, and on today's episode, our host Chelsea Good sat down with Roger McEowen to discuss the One Big Beautiful Bill, its tax implications, a little something called hobby loss rules, planning for transition and taxes down the line, and more.

But before we get started, we wanted to take a moment to thank Superior Livestock Auctions for their sponsorship of this episode.

Superior Livestock ad (01:16):
Superior Livestock Auction is the largest cattle marketing network in North America. Our leadership makes a difference and our customers get top dollar.

"Superior has traditionally been the best price for us, rather than taking them to the sale barn. It's a pretty big deal to have multiple buyers bidding on your cattle from all over the country, too."

Go online or call Superior Livestock Auctions to learn how selling your cattle the Superior way can work for your operation.

Chelsea Good (01:47):
This is Chelsea Good, and I'm really excited to be joined today by Roger McEowan. He's a professor of agricultural law and taxation at Washburn University School of Law in Topeka, Kan. We heard Roger speak at Nashville at the Cattle Industry Convention about the One Big Beautiful Bill and what it means for cattle producers. Roger, thanks for having this conversation with us.

Roger McEowen (02:07):
Well, thanks for having me, Chelsea. Pleasure to be here.

Chelsea Good (02:10):
Well, let's just jump in. Tell me a little bit about the One Big Beautiful Bill. Why was this bill important and what was Congress trying to do?

Roger McEowen (02:20):
Well, it's a big bill that, to say the least. Over 900 pages long. It has multiple titles to it, one of which is a commodity title, but a lot of tax provisions there. It's almost frightening to think where we would be at economically, and for our ag producers specifically, if the bill had not passed because we avoided a major tax increase for many, many people. We retained the QBI deduction - the qualified business income deduction - which is a 20% deduction on your business income if you're not a C Corporation. 

And, of course, under the Tax Cuts and Jobs Act, Congress had permanently reduced the corporate tax to a flat 21% across the board from the graduated rate brackets that C Corporations had to pay. So the QBID was the trade-off, and that would've expired at the end of 2025 if it weren't for the bill.

So we retained that. We got an estate tax exemption at $15 million and then adjusted for inflation starting next year. So that's $30 million for married couple.That would've been cut basically in half had the bill not passed. And of course, if the Fall 2024 elections came out differently, we could be looking right now at a $3.5 million exemption with only a $1 million basis step-up at death, which would've been devastating to small businesses and particularly farms and ranches. And there's lots of other things in the bill. Of course, we have a new senior deduction, which basically is going to, according to the treasury, remove social security tax for about 88% of recipients. That's what the president pushed for was no tax on social security. It didn't come out exactly like that, but it's pretty substantial the way it's put together.

And then of course, the deduction for tip income and deduction for qualified overtime, although much of agriculture won't qualify for that one. And then we've got something that went away with the '86 Tax Act that came back, and that's being able to deduct interest on a personal car loan [or] a new vehicle. We haven't had that for almost 40 years and it came back. So there's lots of things in this bill. 

Of course, on the depreciation side of things, we got 100% bonus depreciation reinstated on a retroactive basis. We've got, in essence, a doubling of section 179 depreciation. So the fast methods of depreciation are there. And I think we're already seeing the economy and businesses take these provisions into account when you look at some of the official government numbers and surveys that have been put out. Capital goods orders were up in the third quarter and fourth quarter of 2025 as well.

We think that will continue in the first quarter of 2026. And I could go on and on, but I think our listeners get the point. This is a very, very significant bill with lots of economic related provisions in it that are good for all taxpayers and good for agriculture in general.

Chelsea Good (05:22):
You mentioned a couple important things there that I'll probably want to drill down more on each of those different pieces: the QBI, the estate tax, the 100% bonus depreciation. But a point you made, I want to make sure our listeners really understand is what could have happened had this bill not passed. The 2017 Tax Cuts and Jobs Act was a really important piece of legislation, but to your point, many of the pieces of that were set to sunset or expire at the end of 2025. Right?

Roger McEowen (05:54):
That's exactly right. There were very few provisions in that law that were made permanent. Now, the corporate tax rate, that was made permanent. That was one of the very few things that was made permanent at the corporate tax rate cut or a flat 21%. So we didn't have corporate income tax possibly as high as 37% and a fraction a little bit higher than that. So that took that off the table permanently. But many of the other provisions did expire or were set to expire at the end of 2025. And so there was a lot at stake when Congress was considering this and they got it done through the reconciliation process. And for those of us that either prepare returns or advise those that prepare returns, that was very helpful to have the legislation signed into law in July instead of this trend that Congress has done in the past and getting their big reconciliation bill with tax provisions in it right after Christmas at the end of the year or even at the beginning of the new year, which takes away the planning window that we have for our farmers and ranchers and other taxpayers.

There is no planning window there. But you're right, there was a lot at stake. I mentioned just a moment ago that we avoided a major tax hike. And I think a lot of people don't realize what that would've been. For those currently in the 12% or that we're in the 12% rate, and because of the bills still are, they would've seen a 25% rate bracket increase. The rate would've gone to 15% for these taxpayers. And that's basically on a married filing joint return taxable income between $25,000 and $95,000. So that's an awful lot of people. And that would've been a 25% rate increase across the board.That's just massive. That was avoided. And I'm not sure that the administration right now is really focusing on that aspect in terms of public relations and explaining this to people as to what was actually avoided. We would've lost 100% bonus depreciation.

It would've been only 20% for this year. We would've lost the QBI deduction. That's that 20% deduction on your business income. And I've reviewed a return last year for a tax preparer in Kansas that had a Kansas farmer as a client, and that deduction, not the income, the deduction for QBI was over $600,000. So that would've been zero if it weren't for this bill. And that would've increased the tax liability for that farm family by about $200,000 coming up in 2026 had QBI not been continued. So there were a lot of things at stake, tremendous amount of stuff.

Chelsea Good (08:37):
Well, well said. And I think that you're right that sometimes people don't stop to think about where we could be today had this not occurred. Certainly I've heard lots of conversation from folks in agriculture that are pleased to have the extra certainty and pleased to have some extra tools as they work on their planning. Let's start first on the estate tax. That was one that was set to drop down to lower levels. Explain to the audience now where do we stand as the start of 2026, as it relates to estate tax, what is the current state of play there?

Roger McEowen (09:14):
Well, our basic exclusion, and we're talking federal estate and gift tax, the basic exclusion is $15 million now per individual. So for a married couple that of course is twice that, that's $30 million. And what that means is that you have this basic exclusion that you can use during life to offset taxable gifts, or if you don't do that, and to the extent you don't use it to offset taxable gifts during life, then it's there to offset estate tax at death. So if you have a net worth in excess of $15 million, you would have some estate tax liability. Or $30 million for married couple. Beneath those levels, there is no worry of federal estate tax. And, Chelsea, we really are in the best of all worlds right now with respect to transfer tax at death because we have the highest ever exemption: $15 million per person.

We have step-up basis at death. So the property included in the decedent's estate gets a basis equal to the fair market value as of the date of death, and that's what the heirs will get in their hands. So you get a step-up basis, which wipes out appreciation that could be taxed if that property were to be sold. And we've got retained portability of the unused exclusion at the death of the first spouse, which by virtue of filing a 706 in the first spouse's estate, that excess amount that's not used at the death of the first spouse to offset tax can be ported over and added to the surviving spouse's basic exclusion amount. So for example, if Dad died and had a $10 million taxable estate, you use the $15 million exemption to offset that, but you would only use 10 of that. The excess [$5 million] - or the remaining [$5 million] - carries over to Mom.

She adds that to her $15 [million] and she now has $20 million. And the nice thing about that is it eliminates the need purely from a tax planning standpoint for that couple to have complicated marital deduction wills or trusts drafted that has specific clause language in it to get that result. I hesitate to say automatic because you have to file a 706 in the first spouse's estate, but once that's done, then it does pour over to the surviving spouse. So that's very helpful. And like I said, this is the best of all worlds on the transfer tax side of things. And we still have, I should mention, we still have the present interest annual exclusion gift amount, and that's set at $19,000 per year. So an individual could gift up to $19,000 on a cumulative basis over the entire calendar year to as many people as they want.

And that doesn't require or their funds allow. And that doesn't require the filing of a gift tax return. That's not a taxable gift. It's only when you get above that amount, that $19,000 per donee per year that you start using the basic exclusion amount of $15 million to offset whatever the taxable amount of that gift is. So really ... really the estate and gift tax system very favorable to us right now. We probably won't get better on this.

Chelsea Good (12:14):
That's well put. That $19,000 gift exemption, making sure we understand, let's say a couple has four children, could they give $19,000 to each of those four children a year and stay underneath that exemption amount?

Roger McEowen (12:30):
Right. They could actually do better than that. Yes, they can give $19,000 to each child, but the spouses can make a special election on a gift tax return and elect to split the gift and have ... In essence, by doing that, each have $19,000 going to each child. So they could get $38,000 to each child by splitting the gift between themselves if they wanted to give more. And that still wouldn't cause any tax issues for them, any gift tax issues.

Chelsea Good (12:56):
It sounds like there's definitely some good tools to have folks sit down with their tax preparers and their financial planners and work with as they're thinking about generational transfer, generational security, and what does it look like passing assets from one generation to the next, either at death or even starting to plan and work on that prior to that one generation passing.

Roger McEowen (13:21):
Right, right. No, it's very favorable for intergenerational transfers. And as interest rates come down, that will help us even more because say if I want to transfer a line of equipment or I want to transfer land during life to a child and we do a 15-year installment sale, or we do a note for two or three years on a line of equipment to the next generation to get them into a position of ownership while we're still ... The initial generation, the transfer generation is still living. Of course, there has to be a rate of interest attached to that. You can't go too low or below what the IRS prescribes, or it is deemed to be a gift. And when you play around with models on this, those transfers are very interest rate sensitive and it increases the cost of the transfer, the higher the interest rate to the subsequent generation.

So interest rates are very important, and that's kind of something in terms of succession plan that we don't often think about if we are transferring assets over time by virtue of various types of contracts or notes. And so as interest rates come down, that's going to be also helpful with respect to the transition process.

Chelsea Good (14:34):
You mentioned depreciation earlier and having a couple different places here where people can take advantage of as it relates to depreciation. Can you talk us through bonus depreciation, but also maybe Section 179 and the expansions to real property as well?

Roger McEowen (14:54):
Bonus depreciation is restored, as I said, back to 100%. Which means if I buy a combine or a tractor, for example, I can write the entire purchase price off. I can deduct the whole thing off in the first year on the return. Now, that may or may not be what I should be doing from a tax planning standpoint. I'm just saying you can do that. Without the bill, we would've been at 20%. So if I'd have had a million dollar worth of asset purchases, I would only get 20% or $200,000 that I could write off in year one. Now I could write the whole thing off.

Chelsea Good (15:23):
Well, as it relates to bonus depreciation, remind us, hadn't bonus depreciation been reducing 20% a year leading up to this bill passing?

Roger McEowen (15:33):
Yes, it had 20 percentage points per year. And without the bill, we would've been at 20% for 2026, and then it would've gone to zero starting in 2027. So it's been restored to 100%, and that's a good thing. And that one, Congress decided that needed to be done to spur asset purchases. And I think we saw initially ... See, this took effect for purchases assets acquired and placed in service on or after Jan. 20, 2026. And even early in the year, we started to see an increase in capital goods orders, and I think that was being spurred by that provision, and that's a very important provision. Now, also, kind of a twin sister to this is Section 179, which is expense method depreciation, which they, in essence, doubled and took it to $2.5 million with a phase out on it. So in essence, once I get up around a little bit over four million on qualified asset purchases, then I'm going to be phased out on my $2.5 million.

And there are nuances between the two provisions. I can't create a net loss with 179. I can do so with bonus.

The problem we run into, however, and I try to encourage farmers to use these two provisions together strategically. Don't just bonus everything that you can because if you dispose of those assets, for example, if you trade, I'll put trade in air quotes, if you trade tractors or combines every few years, then you may be getting into a situation where you're going to trigger depreciation recapture because you've dropped your ... If you're going to take 100% bonus depreciation, you have eliminated your tax basis in that asset. So if you sell that asset, for example, it still has significant value. So you sell up for fair market value and you don't have any basis. All that gain is taxed at ordinary income rates, not capital gain rates that are more favorable. So that's the hit that you would take if you dispose of that asset or do something with it after having taken 100% bonus.

So we want to try to moderate our use of 100% bonus and pick and choose those assets. Some assets will qualify for 179, some assets won't for bonus and vice versa. So the strategic use of those two provisions is what people need to be talking to their tax preparers about and having an evaluation done as to how they best work in their particular situation.

Chelsea Good (18:03):
Have you seen examples of folks not necessarily doing that the most strategically in the past? Or could you maybe give us a hypothetical or an example of how you would want to utilize those together or decide which to use for a certain asset?

Roger McEowen (18:22):
Yeah, there's a trap. An example I use in my seminars for my law students when I cover the tax issues. Example I use is a pretty common trap that farmers can run into that they often don't think about. And we go back to this, I talked about a line of equipment, gifting that to a child, but what if I sell that on, say, on an installment note to a child over a few years, or I just sell my equipment to a child that's the next generation, I sell it to the on- farm air, I'm going to retire to maybe a lease arrangement, I'm going to move to town, let the children or the on- farmer take over the operation. Well, if I bonused my equipment out or even 179, and I don't have any basis in those assets, and now I sell it and the used equipment market is pretty hot, so it's probably got some pretty good value to it.

That's where I'm going to hit what we call section 1245 recapture depreciation. And all of that difference between the price at which I sold it and zero, my income tax basis, is recaptured at ordinary income tax rate. So the income tax rate could be a huge hit on those types of transactions. And that's why we want to sit down with people and farmers and ranchers and kind of feel out what is their long-term strategy here with respect to particular assets. And when we do that, we can get a better picture for what the strategy should be with respect to depreciation claiming on those assets. Which way are we going to go? Are we going to stick with regular depreciation, which would be a smaller amount each year, or do we want to use some of the fast amounts of depreciation? It really depends on what each situation indicates the strategy should be, but there's some traps in there and that 1245 tax trap is a big one that often a lot of people don't think about.

Chelsea Good (20:15):
Talk a little bit about the expansion to real property and how that makes a difference in what people are able to do today versus what they could do previously, especially thinking about cattle producers.

Roger McEowen (20:27):
Well, you're talking about bonus depreciation?

Chelsea Good (20:31):
Yes.

Roger McEowen (20:31):
Okay. Yeah. There's also a provision in the OBA, the One Big Beautiful Bill Act, that is a temporary provision. It's just there for a few years, and it applies 100% bonus depreciation to what's known as qualified production property. Now, the way that's defined, that's basically certain types of real estate. This is a big one, particularly for the construction industry, but it will also apply to certain types of structures built on a farm. Now, farm buildings, and that's especially defined term for depreciation purposes, are eligible for bonus depreciation, not for 179, but they are eligible for bonus. The QPP provision, the qualified production property provision is a little bit broader, and it's going to appeal to particularly the construction industry while it's around. It allows, of course, an immediate write-off of those types of qualified production property, those types of real estate buildings, let me put it that way.

But this one's just temporary. And then we go back to the general bonus, 100% bonus provision for everybody.

Chelsea Good (21:39):
So nearly 98% of farms and ranchers operate as pass-through entities such as sole proprietorships or partnerships or LLCs and S Corps. Talk to us about section 199A and the qualified business income deduction, how it affects these types of businesses.

Roger McEowen (22:01):
Well, it has a major impact. This is a 20% deduction off of your business income. So if that's a farming operation, that'd be straight off the Schedule F. If it's some other type of business, that'd be off the Schedule C. And even some service type businesses will qualify for this too. There's a whole set of special rules for specified service trades or businesses. So this was a major, I would call it a coup that was in the Tax Cuts and Jobs Act that was set to expire at the end of this year, which now continues on. It's a big one. I think our farmers and ranchers have come to depend on that one, and that would've been pretty bad had that one been allowed to expire.

Chelsea Good (22:45):
There was a provision you talked about in Nashville. You called it, I think, a sleeper provision even. Farmland and sales. Can you talk a little bit about how that new Section 1062 might affect some operations?

Roger McEowen (23:04):
I was the original drafter of this one. I was asked by Senator [Mitch] McConnell from Kentucky. His office had called me in June after the bill passed the house, and they wanted to do something to encourage farmers to keep farmland in farming rather than to sell out to a developer. And the original concept they wanted as they presented it to me was a 100% exclusion of capital gain on sale of farmland by a farmer to another farmer who agrees to continue that land in farm use for 10 years. So that's the way I initially drafted it. 

And it went in and came back to me as not a 100% exclusion, but a provision that allows the selling farmer to spread the taxable gain out over four years worth of tax returns. So I would report a fourth of the gain on the return for the year of sale, and then another fourth, and then the third fourth, and then the final fourth on the fourth year.

So when I saw that initially come back, and I looked at it and that, boy, this has really changed. They kept some of my definitions the way I defined things, a qualified farmer and qualified farmland and those types of things. And I was kind of struck by it. Initially, I thought, well, what's the difference between this and just a regular installment sale? And then it dawned on me what they're doing here is they're front loading the cash in the seller's hands and then allowing the seller to spread that tax liability out, the net tax liability out over basically four tax returns, including the one of the year of sale. And so you get your money upfront. Instead of like an installment sale, you would only get a portion of your income, taxable income back each year, and you would spread the tax out over the installment sale, but you'd only get part of your income each year.

Here you get it all. Now, that presents an issue. And again, the buyer has to sign a covenantal restriction on the land that they're going to continue to use it in farming. And if they don't, then the seller is subject to recapture. And that's something that the buyer and the seller would have to deal with in terms of the liability for that by separate contract. So that's not in the actual land sale contract. But the problem that I've been warning taxpayers about and farmers and ranchers and tax preparers is that if a farmer or if your client sells land, uses this provision, they're going to get all the money upfront, but the tax liability, it's not a 100% exclusion. That's still there. They just get to spread it out instead of having to pay it all in the year of sales. So they have to be disciplined to understand that there is that liability for future years and not to get in a position where they spend that money that they got upfront from the sale.

They need to make sure that it's still there to pay that tax liability over time. Now, the benefit is you get your money upfront. The downside is you better hang on to it to be able to pay the tax liability associated with that sale. So that requires some additional thought and additional preparation and discipline by sellers to not get caught in a trap on that one.

Chelsea Good (26:14):
That makes sense. I think you brought up a good point there that there's that covenant and agreement that the land remains in agriculture use for 10 years, but let's say something happens and that buyer turns it into a Walmart, whatever, does something different with the land. I think it sounded to me like your suggestion there was that maybe a seller would want to anticipate that and have some separate agreement about what would occur if that happened.

Roger McEowen (26:40):
Right. That's exactly what I'm saying. For instance, if I sell agriculture land to you and the agreement is, and it's subject to a covenantal restriction that you're going to use it for 10 years, you violate the covenant. The law says, "I'm the one that pays the recapture tax on it. I'm the one that gets hit with the penalty." So I want to sign a separate contractual agreement with you that says, "If you violate this, you pay the penalty." And so that would be the deal that we would strike.

Chelsea Good (27:09):
That makes a ton of sense to me. And I think that's a really good [thing] that goes back to trust but verify our kind of plan for the worst case scenario. I think people would be wise to anticipate that and have a deal like that in place in order for the seller to not be on the hook for a decision a buyer later makes that breaks a covenant.

Roger McEowen (27:31):
Right. And I think we'll see that strategy being used as we go into the future months. This is still brand new. I have had people express interest in it and get a lot of questions on this one. So I know that people are thinking about it and there's some that have probably used it. But I think as we go forward, I have drafted a covenantal restriction language kind of model language that people can use and I haven't come up with a contractual language yet, but that will vary depending on each situation. But basically it's putting the liability on the buyer. The party that violates the covenant should be the one that pays any penalty tax associated with that violation.

Chelsea Good (28:12):
That language that you've drafted, is that something that's available on one of your blogs or where would people look to find that?

Roger McEowen (28:18):
That language is on my Substack and that's mceowenaglawandtax.substack.com.

Chelsea Good (28:24):
Lots of really good resources there. Appreciate you making that available for folks. There was another provision that you talked about in Nashville, I think, and gave a little bit of a word of caution about the hobby loss rules. Can you talk about that a little bit with us?

Roger McEowen (28:39):
Well, the hobby loss rules actually are a pretty high profile audit issue for IRS. They don't do too many farm audits anymore. They've lost a lot of their auditors over the years. They're really slimmed down. There aren't very many audits for all taxpayers in general, but the hobby loss rules, that's one area that they do look at, and it tends to raise its head with respect to various types of agricultural activities. It's not uncommon for someone with a town job, say a higher paying town job to buy an acreage outside of town and run some horses or have some livestock or have a small cropping operation and basically just be weekend, what we would call hobby farmers. Well, if you're running up consecutive years of losses, if you have too many years of losses and you're not showing any income, and particularly if you're high income and you're using these losses from this supposed farming activity to offset your non-farm high income, that's a red flag for the IRS.

And I see probably one or two cases every month or so in the US tax court. Most of those are losses for the taxpayer. Now, we just had a recent victory by the taxpayer, but these all depend on the facts and the IRS uses nine factors to do determine whether the taxpayer has the necessary profit intent. And like I said, there are socioeconomic factors. If you're high income and you like running up these losses, that's going to be against you. If you're conducting it like a business, that's going to help. If you keep really good records, that helps. In fact, that's what won the case for the recent taxpayer in tax court was they had real good business records. And so basically, if you're running it like a business, if you're trying to learn how to market your product that you're raising, if it's livestock, are you going to meetings learning how to produce these livestock and minimize your death loss, so forth and so on, then that kind of looks like you do have a profit intent.

And that's what the key is on a hobby activity. Are you doing this? Are you engaged in it with the intent of making a profit or do you not care? And if you don't care, you're going to be deemed to be a hobby. And the problem with that is you can't deduct any of the losses and any income that is derived from the activity you have to report. So there's no offset on it. It's a double penalty for you.

Chelsea Good (31:10):
And I think some of the other factors I've seen you talk about a little bit is things like written business plans and evidence of operational changes when there is a loss. If there's a persistent loss, do people change their behavior or do they continue to do the same thing because that might indicate whether they're really trying to make money or not?

Roger McEowen (31:30):
Yeah, that's exactly right. You do want to have good business records. You do want to be able to document what you're doing to show that you actually intend to make a profit. Those are probably, I would say, the most important factors that the court looks at. Now, there are multiple factors and I'll tell you, they do look at horse activities probably more closely. That's probably for good reason. It's probably easier to lose money with horses than it is with respect to others type of livestock operations or row crop operations. I think you probably heard the old maxim that's out there. How do you make a million dollar in horses? Start with $2 million.

Chelsea Good (32:08):
Or $10 million.

Roger McEowan (32:10):
Which is true. Or $10 million. And under the rules, you've got a certain period of time to turn it around, to turn a loss activity around into a profitable activity.

You get a little bit more time with horse activities than with non-equine activities, and that's just because of the nature of the beast. Plus, I'll tell you, at the time they wrote these rules, and the more favorable provision was put in for horses in terms of giving taxpayers a longer period of time to establish a profit intent. The chair of the House Ways and Means Committee and the chair of the Senate Finance Committee were from Kentucky and Tennessee. And as you know, Chelsea, that's the way often legislation goes. That's the way politics goes. Who controls the committees?

Chelsea Good (32:55):
Yep. That's funny. As you were starting to say that, I was thinking I can think of a couple states and it was a state that might be particularly interested in allowing horse hobbyists a little bit additional time to work on that activity.

Roger McEowen (33:13):
Yeah, that's often the way it goes. Yep.

Chelsea Good (33:15):
This has been a really interesting conversation for me. I do have another couple questions that are maybe a little bit more general about planning in general and some advice for producers there, but is there anything specific to the One Big Beautiful Bill that you would want to talk about that we haven't talked about yet prior to talking about maybe the value of doing some operation and transition planning in general?

Roger McEowen (33:43):
Well, there's one thing that ... Well, it's designed to incentivize banks to loan money to farmers in rural areas where the loan is secured by agricultural real estate. And this is a new code section that allows FDIC insured banks and some insurance type companies to be able to deduct 25% of the interest income on that loan that is secured by agricultural real estate. And the way that's defined is real estate that is used to produce at least one ag commodity. It also applies to aquaculture too. So fish farming is in there. The idea here is that ... Actually it was the Kansas Bankers Association that was the primary lobbyist on this. Had been pushing for it for some time. The idea here is that the FDIC insured banks, the non-farm credit system banks have always griped that they don't get a tax break like Farm Credit System does.

So now they've got somewhat of a tax break and they can exclude from income 25% of their expenses, their business expenses that were derived, incurred, I should say, to derive that loan, to produce that loan for the qualified farmer that's secured by qualified farmland. Now, they have to offset that deduction by offset that income exclusion by reducing their expense associated with deriving that loan by 25%. So if I'm going to exclude 25% of the interest income, my expenses in deriving that deduction, I reduce by 25%. So the bottom line, the basis point reduction, probably about 15 points to 25 points. So 1500s to 2500s of a percent would be the interest rate reduction on these loans for farmers. Is that enough to stimulate these banks to encourage or incentivize these banks to reduce the interest rate to farmers? I think that's questionable, but it is a tax break for the banks and we'll see whether it actually translates into lower interest rates for farmers on these types of loans.

Chelsea Good (35:55):
That will be interesting to maybe look at some data in the future on that and determine whether that was effective policy or if more incentive would've been needed.

Roger McEowen (36:04):
Yeah. And I know the American Bankers Association is pushing to either eliminate that 25% reduction in their business expenses or increase the interest exclusion percentage. So it may come back in the future retooled at some point, but at least there is a provision in there now for them and there hadn't been previously.

Chelsea Good (36:27):
Well, this was very helpful for me hearing you talk through some of the pieces of that one big beautiful bill that can affect a producer and their operations day-to-day. And I want to zoom out and talk a little bit more globally for a minute. This gives people more certainty. We've got some provisions that used to be expiring or potentially expiring or sunsetting, and we know that they're now permanent, but you still have to plan. And I would love to hear your perspective on your ranch families and the right way to have the conversations about what the future of the operation is and how a transition's going to go. Are there things that you would recommend for a ranch family that has not started any planning? What would you say to them?

Roger McEowen (37:18):
I would start the conversation by asking them how much sand is in the top of their hourglass. And what I mean by that is none of us know how much time we have left. We tend to put off things that seem to be difficult that we really, "Yeah, I know I need to do that, but that's so overwhelming. I don't know where to start. So I'm just going to ignore it. " And before you know it, a lot of the sand is slipped out of the top of your hourglass and is now in the bottom and it's slipping away faster and faster. And what I'm talking about there is a lifespan. And so you need to think about intergenerational transfer of the business, intergenerational transfer of the wealth in the least tax cost manner, the most tax effective manner that fits with your overall goals and objectives.

There is no one size fits all. Many of our farming operations have both on-farm and off-farm errors, which presents a whole nother problem because we don't want the off farmers to have control of the operation after the senior generation is gone. That needs to be vested in the hands of the on- farm heir or heirs. But the off-farm heirs still want an inheritance. Many times the parents want to treat all of the children fairly, but that doesn't necessarily mean equally. Those are two different concepts there. And so we want the control interest to go to the on- farmers. We want some roughly equivalent value in terms of a financial interest going to the off-farm heirs, and keep that business as a viable economic enterprise in the subsequent generations. And it's tough. It is difficult. And then you throw in the possibility of, for example, the need to protect the business from liability concerns, the need to protect the future generation, the business and the future generations from the senior generation having to pay a long-term healthcare bill, which could end up if there's no plan in place having to sell off assets if that care bill is long enough in terms of period of time, that's expensive.

Our nursing home costs in Kansas right now is running about $125,000 a year. What's your plan for that? Many people don't want to have to sell off land. That's the last thing that they want to have sell. What if you have to sell a 20 or a 40? What happens if you have to liquidate machinery and equipment, those types of things? So that needs to be part of an overall plan. That's part of a good transition plan. I often, when I'm talking to farmers, I try to put this in perspective.I mentioned that many times we don't bat an eye about spending $6,000, $8,000, $10,000 on tires, a spreader tire, for example, example. Then we balk at paying that amount for a well-put-together estate plan that could not only save us several million dollars in federal estate tax, but it could also keep the business intact for future generations.

So the question is, is your legacy worth the cost of a tire? And when you look at it that way, I hope that encourages people to think a little bit deeply that that is probably a pretty good investment. If our desire is to keep the operation intact for subsequent generations, yeah, there'll be some cost to do that, but the cost of not doing any planning's probably greater.

Chelsea Good (40:47):
Well, and I think you're also investing not just in the financial component of a successful transition, but also the human element because you mentioned that sometimes what is fair is not always equal. In many of these ranch families, we have some kids that choose to come back to the ranch and become part of the operation and some that have a blend where they have other components of their life and they're involved, but not to the same degree. And then we might have some that move to town or city and that's not the life they've chosen and they're not engaged in the operation. And so they might all have different ideas in their mind about what should happen to the operation. And if the generation in front of them, if they don't articulate their desires and have a plan and have that talked through in advance, I've seen it create a lot of tension surrounding something that's already a bad experience, which is the loss of a parent.

I hate it when I see the loss of a parent also lead to tensions within siblings, that's not good either. And so you're investing in those relationships by having some of those tough conversations on the front end. Is that a fair way to frame it up?

Roger McEowen (42:12):
No, that's very good. And what complicates this is that estate planning, and I would throw in social security planning in this too, in terms of when I should start drawing benefits, because that needs to be part of the discussion too from a financial standpoint. But a lot of what we do in estate planning or business transition planning, it's speculative. For example, people will ask me, "When should I start drawing social security benefits?" And they'll give me their data and so forth. And I said, "Well, if you tell me when you're going to die, I can tell you when you should start drawing your social security benefits." Estate planning is often like that too. We don't know what the future holds. We don't know whether there's going to be an event that totally is going to disrupt the plan. One of those could be a divorce where perhaps a son-in-law is already working with his inlaws in the farming operation and then the daughter and he goes Splitsville.

Well, what's your plan in place in case that happens? Things could go haywire if there's no plan in place to deal with that. So we try to build backstops into an estate plan, a transition plan to deal with the things that we can't control. And a good way to do that is a buy-sell agreement, a first option agreement, and we want to think through what the triggering events are for those types of agreements. And so it could be an untimely death, it could be a divorce, it could be a disability, so forth and so on. So there's just so much to think about when it comes to estate planning, when it comes to social security planning, when it comes to transition planning, we just try to do the best we can as planners to anticipate what could go wrong and try to stop, fill those holes, plug those holes up because in the 30 some years I've been doing this, I've seen some really bad results that I get hauled in on the backside to try to repair, but the damage has already been done.

So it is difficult and the longer, the sooner you start on this and you start thinking about these things. I try to encourage people, keep working at it. Don't just get a plan and have a plan drafted for you and let it sit there because those plans can go stale quickly. Congress changes the rules. Rules lapse, rules change, something new comes along, a benefit that we had is no longer there. Some doors have closed. We've got to modify those plans. And so we want to be as flexible as we can, yet try to anticipate where the landmines could be. So it's tough and it's tough on farm families, but it's even worse if you do nothing.

Chelsea Good (44:52):
That makes a lot of sense. And even in my personal life, I did financial planning last and updated my will and I think 2021 before I got married, I didn't have nephews in 2021. Well, today I have two nephews and recently met with my attorney, who's also a Washburn alumni, classmate of mine, to talk about do I want to make some adjustments because we've got another generation that wasn't in play when I was first making those decisions. So it doesn't seem like it's just been five years, but those five years had events in them that are causing me to think a little bit differently about what I would want to happen with my assets than I was previously. Do you see families that plan but fail to look at the plan again and adjust? Is that one of the common fact patterns you see that causes some wrinkles?

Roger McEowen (45:47):
Oh, it is. Stale plans are not uncommon. There's really two aspects to this. According to national survey data I've seen, and I have no reason to believe that Kansas or Nebraska, Iowa or the farm country is different than the nation on this one, is that about two thirds of people don't have an estate plan or an up-to-date estate plan in place. And that's kind of a shocker, but that data has been there for quite some time and it really doesn't change much. So either we're ineffective as professionals in getting the word out or this is just something that's very difficult to change hearts and minds on that they need to do something on these things. And the other one is there's a percentage of people that have plans that have not been updated and are no longer current. Most recent example I had is I had a couple within the past year ask me to look at an estate plan to see if it needed to be updated.

And when I opened the package up that they sent me the cover letter from the attorney that did their estate plan was dated Aug. 18, 1974. I didn't even have to look at the rest of the documents.

Chelsea Good (47:01):
You knew it was stale?

Roger McEowen (47:01):
Yeah, you got to start over on this. There's really not anything here that's of value to you much anymore because the laws have changed, your family has changed, your asset values are tremendously different now. We got to start over from scratch. And so I don't think that's uncommon to see outdated estate plans. Now, maybe not 50 years outdated. And if you're wondering, yeah, it's probably good to put on your tickler system that update the estate plan every 50 years.

Chelsea Good (47:35):
Or even more frequently than that.

Roger McEowen (47:37):
Yeah, maybe try every two years. That might be a good idea. But, yeah, there are a lot of stale plans that are out there and it's unfortunate.

Chelsea Good (47:46):
You kind of mentioned failure to plan too is one of those pieces. Part of it just folks not wanting to have the hard conversation. Nobody wants to talk about what happens if Dad dies, what happens if your brother dies before your Dad dies? What happens if someone gets cancer? I mean, they're hard things to talk about. Do you have a recommended list of questions or even some tactics for families to start those conversations?

Roger McEowen (48:18):
That's a real good question. Where I like to start with people is in terms of getting them engaged, because one of the things to overcome is the feeling that they're overwhelmed and they don't know where to start. That's one. The other one that's a big one out there that keeps people from doing estate planning that I've experienced is that Mom and Dad, they don't want to upset any of their children. So this is their idea that, "Well, I need to treat all of them equally and if I don't, somebody's going to be upset." Well, when you're dealing with a farm business, it's a business decision and it's your business decision. You can't start there. If you try to start there, you're going to get hung up and you're not going to get started. And it's kind of back to that, also that feeling of, I got this major project that's out there, oh, I'll just do easy stuff and I'll let that sit.

And so you don't do the hard stuff, you don't even chip away at it. So where I like to start with people is I send them two documents. I send them a document that I call summary of assets and liabilities and just get them to list out their assets and kind of put a value on them. And then I have them do a balance ... A balance sheet.

Chelsea Good (49:33):
Okay.

Roger McEowen (49:33):
Yeah. I want to see a balance sheet and then a separate summary of assets and liabilities. And then what's your basic objective? I try to get people to look at the end. What's your end goal? If you were sitting here just kind of dreaming about what your farming or ranching operation would look like 40 years from now, 30 years from now, when you're not around, what do you want? Let's move to the end, forget all the hard stuff, the nitty-gritty stuff. Let's just go to the end. Where do you want this to be? What do you want it to look like? Who's in control? Give me an idea of what that is. And once I see that and I see what your assets and liabilities are and I see what your balance sheet is, then we've got a starting point. And what I find is that approach gets people engaged and now we can start moving and then you pick away the more difficult pieces one at a time.

But seeing the broader picture and getting people to think about the backend first, instead of worrying about the front end, I think that's a good approach. At least it's worked for me.

Chelsea Good (50:42):
That makes sense starting with the end in mind, because it is a slightly less awkward question to say, what do we want this operation to look like in 50 years or a hundred years than to say, "What happens when I die?" Because I think there's, depending on the age of folks, there's sometimes assumptions of, okay, that's a new generation in charge, that's a blank sheet of paper, let's talk about and think about what that looks like. That feels like a more positive building activity rather than focusing on the events that occur that cause there to be changes.

Roger McEowen (51:20):
I think if we focus on the current things, we can kind of get lost in those. And so that's what I'd like to see people do is think, well, let's think more broadly. What's the big picture here? What do you want your family situation to be like in terms of this business? Well, then we back up and think about those things that can get us to that goal. That's where the family doesn't have to worry about those details. That's up for their planner to figure out those details, but we know where we're going. That's been my approach to teaching law students and undergraduates over the years is let's go to the back, for example, the back of the chapter first. What I'm about to teach you, what's the point of all of this? For example, as we record this, next week I start talking Chapter 12 bankruptcy with the law students.

Well, I'm not going to just dive in on the detailed rules of Chapter 12. I'm going to go to the back end and ask a question, why do we care about Chapter 12? What's the purpose of Chapter 12? Where are we going with this? And we'll talk about that for a bit. And then we'll go back to the beginning and say, okay, now let's look at the rules that actually get us there. That's the approach I think people should to come at estate planning with.

Chelsea Good (52:37):
I also think this One Big Beautiful Bill Act, there was enough in it, enough changes. There's been enough talk about it that it could even be the thing that causes people to start this conversation. Maybe you are the younger generation of a multi-generational operation and feel a little odd starting the conversation. It could be more comfortable to say, "Hey, I heard this podcast and I heard Roger McGowan talking. It sounds like there's lots of changes. Maybe we should together work with our team, our accountants, our tax advisors, our attorney, maybe even our lender, and get the family together and figure out how these things might apply to us."

Roger McEowen (53:23):
Well, if we get one family to do that based on this podcast, then I think we've been successful.

Chelsea Good (53:28):
I agree. I agree. This has been an awesome conversation for me. I want to give you the last word: Is there any takeaway that you want to make sure folks here as they're thinking through all of the things we've talked about today?

Roger McEowen (53:43):
Well, I think the take home on all this is much of this is very, very complicated. It has real implications for farming businesses and for estate plans, and they need to be talking to their attorneys, their CPAs, their financial people, their financial advisors, insurance people, and all of those people need to be in on the discussion. That's how you get a full package put together. Does it cost more to do that? Sure. Are the benefits there? Definitely. And particularly when there's so many benefits now that are out there tax-wise and estate planning-wise because of the new law, that puts a premium on quality advice. Take advantage of those advisors who work in these fields and do so competently. They can really be a huge benefit to you.

Chelsea Good (54:31):
One thing that I love that Angus does is oftentimes they conclude these podcasts by asking one good thing that's happened to you personally or professionally recently. I'd love to hear your answer to that question.

Roger McEowen (54:43):
Well, I tell you, probably the most rewarding thing based on what I do is occasionally I will have people come up to me at a meeting that I'm doing or they'll call me because they feel that they just wanted to share something with me. And that happened just a couple of months ago. I was speaking, getting ready to speak. In fact, this one happened to me right before I had to take the platform, which made it a tough situation for me, was individual came up to me and introduced themself to me and said, "You don't remember me, do you? " And I apologize because I didn't. I didn't remember them. And they said, "Well, it was about 25 years ago. We came to you through extension at K State and we had a real tough situation in our farming operation and it was looking like we weren't going to be able to do a successful intergenerational transfer.

Family wasn't getting along. Looks like things were going to be broken up. Land was going to have to be sold and fractioned off. And you spent time with us, you gave us a lot of resources. You helped us assemble a team of advisors and pointed them in the right direction and helped them through the process and just wanted you to know here we are 25 years later that the farm is flourishing. We've transitioned to the second generation and the problems that we were facing, we tackled them successfully. That's the most rewarding part of what I do. That happened again pretty recently.

Chelsea Good (56:14):
That is awesome. That has to be just a phenomenal feeling!

Host Lynsey McAnally (56:23):
Listeners, for more information on making Angus work for you, check out the Angus Beef Bulletin and the Angus Beef Bulletin EXTRA. You can subscribe to both publications in the show notes. If you have questions or comments, let us know at abbeditorial@angus.org and we would appreciate it if you would leave us a review on Apple Podcasts and share this episode with any other profit-minded cattlemen. Thanks for listening. This has been Angus at Work!