Tax changes loom for dairy farms as key TCJA provisions sunset in 2025. The financial landscape is shifting from vanishing equipment write-offs to shrinking estate exemptions. Discover how these expirations could impact your bottom line and learn strategies to protect your farm’s future in uncertain times.
Summary:
The 2017 Tax Cuts and Jobs Act (TCJA) provided significant benefits to dairy farmers, but three key provisions are set to expire in December 2025. The 100% bonus depreciation for equipment purchases will phase out, potentially delaying tax relief on crucial farm investments. The doubled estate tax exemption will revert to lower levels, threatening generational transfers of land-rich operations. Finally, the Section 199A pass-through deduction, which allows a 20% deduction on qualified business income, may disappear, increasing taxable income for most dairy farms. These changes and ongoing challenges like rising feed costs, labor shortages, and trade pressures from agreements like USMCA create a complex financial landscape for dairy producers. Urgent and proactive tax planning, including accelerating equipment purchases, strategic gifting of assets, and exploring entity structure changes, will be crucial for farmers to navigate these impending shifts and protect their operations’ long-term viability.
Key Takeaways:
- Bonus depreciation for equipment purchases will decrease from 100% to 0% by 2027, impacting farmers’ ability to write off significant investments quickly.
- The estate tax exemption is set to drop from $13.61 million per individual to approximately $6.98 million in 2026, potentially forcing partial sales of family farms.
- Section 199A pass-through deduction, allowing 20% deduction on qualified business income, may expire, increasing taxable income for 94% of U.S. dairies.
- Global trade pressures, including USMCA impacts, compound the effects of these tax changes on dairy farm profitability. The reduction in bonus depreciation, the decrease in estate tax exemption, and the potential expiration of the Section 199A pass-through deduction could make U.S. dairy farms less competitive in the global market, particularly against countries with more favorable tax regimes.
- Rising input costs (18% increase in feed prices since 2023) and labor shortages are pushing farms toward automation just as tax incentives decrease.
- Proactive strategies include accelerating equipment purchases, utilizing lifetime gifting, exploring sale-leaseback agreements, and considering entity structure changes.
- Dairy cooperatives face unique challenges with Section 199A, as only 65% of patronage dividends typically qualify for the deduction. If the Section 199A pass-through deduction expires, as is currently scheduled, dairy cooperatives could see a significant increase in their tax burden, potentially affecting their ability to compete in the market and provide returns to their members.
- Farmers should use tax professionals to model scenarios incorporating tax changes and market pressures.
Three pillars of the 2017 Tax Cuts and Jobs Act (TCJA)—100% bonus depreciation, doubled estate tax exemptions, and the Section 199A pass-through deduction—will sunset on December 31, 2025. For dairy farmers whose operations rely on equipment investments, multi-generational land transfers, and pass-through business structures, these expirations threaten significantly higher tax bills, tighter cash flow, and disrupted succession plans. With Congress gridlocked and global trade pressures mounting, the potential impact of these tax changes on dairy farm profitability is grave, making proactive planning critical for survival.
The TCJA’s Farm-Friendly Provisions: What’s at Stake
1. Bonus Depreciation: A Dairy Farmer’s Best Friend (Until 2025)
What’s Expiring:
The TCJA allowed farmers to deduct 100% of qualifying equipment or facility costs upfront (e.g., robotic milkers and manure digesters). This “bonus depreciation” began phasing out in 2023 and will drop to 40% in 2025 before expiring in 2027 (IRS Publication 225, 2024; USDA ERS, 2024). We’ve had these tax cuts for eight years, but farmers may not be thinking about this and what it could mean. This “bonus depreciation” began phasing out in 2023 and will continue to decrease until it expires. Here’s the phase-out schedule:
| Year | Bonus Depreciation Percentage |
|---|---|
| 2022 | 100% |
| 2023 | 80% |
| 2024 | 60% |
| 2025 | 40% |
| 2026 | 20% |
| 2027 | 0% |
This table clearly illustrates the gradual reduction in bonus depreciation, helping farmers understand the urgency of making equipment purchases sooner rather than later to maximize tax benefits.
Impact on Dairy:
- A $500,000 robotic milker purchased in 2025 yields a $200,000 deduction (vs. $500,000 in 2022). Post-2025, deductions revert to 7- or 20-year schedules, delaying tax relief (PKF O’Connor Davies, 2023).
- Rising input costs exacerbate the pain: Feed prices have surged 18% since 2023, while labor shortages (cited by 63% of dairy operators) push farms toward automation (USDA ERS, 2024).
Strategic Moves:
- Accelerate Purchases: “Prioritize equipment upgrades before year-end,” advises Paul Neiffer, a farm CPA.
- Lease Flexibility: Consider sale-leaseback agreements to maintain liquidity (Iowa State University Extension, 2023).
2. Estate Tax Exemptions: A Ticking Clock for Family Farms
What’s Expiring:
The TCJA doubled the federal estate tax exemption to $13.61 million per individual ($27.22 million for couples). Without action, it drops to ~$6.98 million per individual in 2026 (IRS, 2019; USDA ERS, 2024).
Dairy-Specific Risks:
- Land Values: A 500-cow dairy with 1,000 acres could face a 40% tax on assets over $6.98 million, forcing partial sales (USDA ERS, 2024).
- Global Pressures: USMCA trade agreements have destabilized milk pricing, with Canadian dairy imports undercutting U.S. markets by 12-15% (Reddit/CostcoCanada, 2025).
Planning Tools:
- Lifetime Gifts: Transfer assets now to lock in higher exemptions. The IRS allows $19,000 annual gifts per recipient (USDA ERS, 2024).
- Conservation Easements: Reduce appraisals by restricting development (Urban-Brookings Tax Policy Center, 2024).
3. Section 199A Deduction: The Pass-Through Lifeline
What’s Expiring:
The TCJA let pass-through entities (e.g., LLCs, S-corps) deduct 20% of qualified business income (QBI). A dairy netting $500,000 saved $37,000 in taxes (Tax Foundation, 2024).
Political Uncertainty:
- Cooperative Nuances: Dairy cooperatives face unique IRS rules—only 65% of patronage dividends qualify for the deduction (USDA ERS, 2024).
- Global Contrast: Canada’s supply management system stabilizes prices but limits growth, while U.S. subsidies create volatility (Reddit/CostcoCanada, 2025).
Workarounds:
- Fiscal Year Shifts: Switch to a November year-end to defer income (USDA, 2024).
- C-Corp Conversion: Rare but viable for large operations if 199A lapses (KPMG, 2025).
Legislative Wildcards: Trade Wars and Tax Code
Chances of Extension:
- Bonus Depreciation: Likely. Both parties support pro-business incentives (BPM, 2024).
- Estate Exemption: 50/50. Democrats argue it benefits “dynastic wealth” (Urban-Brookings, 2024).
- Section 199A: Unlikely. Critics call it a “tax cut for the wealthy” (Tax Policy Center, 2024).
Preparing for All Scenarios:
- Model Multiple Outcomes: Use USDA’s Farm Income Calculator to project 2026 liabilities.
- Flexible Income Timing: Defer 2025 income via prepaid expenses or delayed milk checks.
- Review Entity Structure: Revisit LLC/S-corp status with a tax advisor.
Dairy-Specific Case Study: The Johnson Family Farm
The Challenge:
- 2025 Plan: Buy a $1M manure digester using 40% bonus depreciation ($400K deduction).
- 2026 Risk: If 199A expires, taxable income jumps $200K, costing $74K more in taxes (USDA ERS, 2024).
Their Strategy:
- Lock in depreciation by placing the digester in service by December 2025.
- Gift 200 acres to their son, leveraging the $13.61M exemption before it drops.
Global Context: Trade Wars and Supply Chains
USMCA Fallout:
- Canadian poultry imports now account for 9% of the U.S. market share, squeezing margins (Reddit/CostcoCanada, 2025).
- Cross-Border Competition: U.S. dairy farmers face a “double whammy” of expiring TCJA benefits and cheap Canadian milk solids (Reddit/CostcoCanada, 2025).
Consumer Pressures:
- Grocery prices for staples like eggs (+19%) and beef (+15%) strain household budgets, reducing demand for premium dairy (Reddit/MoneyDiariesACTIVE, 2024).
Conclusion: Don’t Wait for Washington
The TCJA sunset poses existential risks for dairy farmers battling trade imbalances and input costs. Proactive steps—accelerating purchases, strategic gifting, and stress-testing cash flow—are essential to weather the storm.
Final Recommendation: Engage tax professionals to model scenarios incorporating USMCA impacts and labor/feed cost synergies. Assume the worst, hope for the best—and build a plan that works either way.
Learn more:
- How Trump’s Re-Election Will Redefine the Dairy Industry
- Top Dairy Farm Transition Planning Traps to Avoid
- Profit or Perish: The Harsh Taxman Cometh for Small Dairies
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