If certain members of Congress have their way, private grain companies may once again have a level playing field with cooperatives in U.S. tax law.
A new bill would fix the unintended consequences of the recently enacted Tax Cuts and Jobs Act that was signed into law on Dec. 22, 2017, effective for taxable years beginning after Dec. 31, 2017.
The new legislation has been inserted as part of the fiscal year 2018 omnibus appropriations bill. The legislation, if approved by Congress, would be retroactive to the start of the 2018 tax year on Jan. 1.
Current law
As it currently stands, individual taxpayers may claim a deduction under new section 199A equal to 20 percent of qualified net business income from a partnership, S corporation, or sole proprietorship, as well as 20 percent of qualified REIT dividends, qualified cooperative dividends, and qualified publicly traded partnership income. Special rules apply to specified cooperatives and their patrons.
Specifically, a farmer generally may claim a deduction with respect to sales of agricultural products equal to 20 percent of the net business income, subject to either a wage or wage/capital limitation in the case of taxable incomes above $157,500 (single) and $315,000 (married filing jointly). For farmers with taxable income below those levels, the wage and wage/capital limitation does not apply. Regardless of the income level, the deduction may not exceed 20 percent of the farmer’s taxable income (excluding capital gains).
A special rule permits a farmer who sells his/her agricultural product to the cooperative to determine the deduction based on 20 percent of the gross payments received from the cooperative. Unlike the deduction described above, this 20 percent gross deduction is not subject to the wage and wage/capital limitation. Similarly, a special rule permits the agricultural cooperative to determine its deduction based on 20 percent of the cooperative’s gross income, less deductible payments to the farmer patrons (and subject to the wage or wage/capital limitation).
Under both special rules, the deduction may not exceed taxable income (excluding capital gains). These deductions may result in the farmer’s and/or the cooperative’s taxable income being reduced to zero, but would not create a net operating loss carry forward.
Modifications
To address concerns that the current law special rules for cooperatives and their farmer patrons are creating an unintended incentive for farmers to sell their agricultural products to cooperatives, the modification to section 199A would replace the special rules with the following approach.
Cooperatives would be permitted to determine their deduction based on rules substantially similar to those under old section 199, including the flexibility of retaining a portion of their deduction to offset income at the entity level and/or pass through some or all of the deduction to their farmer patrons.
Farmers selling their agricultural products to independent buyers would continue to determine their deduction as under current law section 199A.
Farmers selling their agricultural products to agricultural cooperatives (of which they are a patron) would be able to claim a deduction equal to 20 percent of the net business income on such sales, subject to either the wage or wage/capital limitation if the farmer has taxable income above the $157,500/$315,000 thresholds described above. This deduction would then be reduced by an amount equal to what the farmer would have had to forgo under old section 199 as the individual benefit had he/she sold to a cooperative (i.e., the lesser of 9 percent of the net income from the farmer’s sales to the cooperative or 50 percent of wages attributed to such sales). This modified deduction, as under current law, would be limited to 20 percent of the farmer’s taxable income (excluding capital gains). In addition to this modified deduction, the farmer would be able to claim the pass-through deduction from the cooperative (if any), up to the farmer’s taxable income (including capital gains), after applying the farmer’s individual deduction under section 199A.
Reaction
Members of Congress who worked on the fix expressed hope the modifications would quickly be enacted into law.
House Ways and Means Chairman Kevin Brady, R-TX, said in a statement, “The Tax Cuts and Jobs Act allows a first-ever 20 percent deduction for pass-through business income. This incredibly important provision for our local job creators was identified as having unintended consequences in the agriculture community (This) solution will restore the competitive balance that has long existed in the marketplace. I look forward to working with my colleagues in the House and Senate to enact this solution as quickly as possible.”
Senate Finance Committee Chairman Orrin Hatch, R-UT, joined members Chuck Grassley, R-IA; Pat Roberts, R-KS; John Thune, R-SD; and John Hoeven, R-ND; in issuing a joint statement saying, “The new, pro-growth tax law was designed to lift hard-working, middle-class families— whether they are farmers, ranchers or entrepreneurs—and the economy as a whole.
“After discovering an unintended consequence that created an inequity within the agricultural business community, we’ve worked extensively with stakeholders, our colleagues and the administration to develop a solution that will level the playing field and ensure the nation’s cooperatives, independent small businesses and publicly traded firms can fairly benefit from pro-growth tax reform.
“The stakeholder-driven agreement announced today achieves this goal and restores balanced competition within the marketplace. We’re committed to working with our colleagues to act swiftly on the measure and get it signed into law as soon as possible.”
The National Council of Farmer Cooperatives and National Grain and Feed Association also issued a joint statement saying they support inclusion of the legislation to amend Section 199A
The groups said in their statement the new legislation is designed to achieve the two fundamental objectives of stakeholders: First, to replicate to the greatest extent possible the tax benefits accorded to farmer-owned cooperatives and their farmer-patrons under the previous Section 199, also known as the Domestic Production Activities Deduction, of the tax code, as it existed prior to its repeal in the Tax Cuts and Jobs Act enacted on Dec. 23, 2017; and second, to restore the competitive landscape of the marketplace as it existed in December 2017 so that the tax code does not provide an incentive for farmers to do business with a company purely because it is organized as a cooperative or private/independent firm.
“Throughout the tax reform process that began last year, NCFC has consistently called on Congress to retain DPAD for famer co-ops and their member-owners and this legislation largely meets that goal. The old Section 199 had a proven track record of letting farmers keep more of their hard-earned money. We expect these provisions to do the same,” said Chuck Conner, president and CEO of NCFC. “By combining the individual-level business deductions that farmers can claim and the pass-through from their co-ops, farmers selling to cooperatives have the opportunity to see benefits in excess of the 20 percent 199A pass-through deduction.”
“We would also like to recognize the tireless efforts of Sens. John Thune of South Dakota and John Hoeven of North Dakota to ensure fair treatment for farmer co-ops and their member-owners,” Conner said. “They have brought together both sides and fostered an atmosphere that has made today’s proposal possible.”
NGFA President and CEO Randy Gordon said great care was taken by stakeholders to develop a concept that provides tax relief to farmers, as envisioned in the tax-reform law, while restoring to the maximum extent possible the competitive balance in the marketplace. NGFA noted its members consist of an almost equal number of grain, feed and grain-processing businesses organized as cooperatives and private/independents.
“Given the complexities of the issue and the different types and sizes of businesses, no legislation will ever be perfect for every income or business situation,” Gordon said. “But the stakeholder concepts on which this legislative language is based have been analyzed and reanalyzed in excruciating detail by tax experts representing both cooperative and private/independent businesses, as well as Congressional tax staff experts. We believe the solution merits enactment so that competitive choices remain available to agricultural producers and the marketplace—not the tax code—determines with whom they do business. We appreciate the commitment of members of Congress, Republicans and Democrats alike, to get it fixed.”
NGFA joined in thanking members of the Senate for working with stakeholders, as well as several Democratic senators who have expressed an interest in seeing the issue resolved.
NCFC and NGFA said they will remain engaged on this critical issue until a stakeholder-led solution is enacted by Congress.
Kevin Skunes, president of the National Corn Growers Association said in a statement, “We are pleased with the outcome of the recent negotiations to craft a solution for Section 199A of the Tax Cuts and Jobs Act. This agreement is extremely important for addressing the provision’s unintended consequences and restoring certainty to the marketplace for farmers. NCGA has supported coalition efforts to replicate the tax benefits of the original Section 199 within the tax reform bill.
“We greatly appreciate the work of Sens. Hoeven and Thune along with the leadership of House Ways and Means Committee Chairman Brady and Senate Finance Committee Chairman Hatch to develop this critical legislation. NCGA urges the Congress to adopt the proposed changes with bipartisan support later this month.”
Meanwhile, Under Secretary for Marketing and Regulatory Programs Greg Ibach issued a statement saying, “The sweeping tax cuts and reform package championed by President Trump and passed by Congress is already working as designed, empowering growth across all economic sectors, including agriculture. An unintended consequence of the new law caused disparate treatment among independent operators and cooperatives in the same industry.
“Federal tax policy should not be picking winners and losers in the marketplace. We applaud Congress and stakeholders for coming together and agreeing to a solution for the good of all agriculture. At USDA, we will provide whatever information is necessary to support Congress in their efforts to have the proposal included in the omnibus appropriations bill.”
Larry Dreiling can be reached at 785-628-1117 or [email protected].
