By: Matt Reese, Ohio’s Country Journal
While many have suggested the recently passed tax law has numerous benefits for agriculture, there are some potential negative implications for private grain companies and other privately held purchasers of agricultural goods.
A provision affecting the qualified cooperative dividend was added to the tax bill late in the process last year in an effort to avoid a tax increase for farmers previously relying on the Section 199 Domestic Production Activities Deduction. The problem that has since surfaced, however, is that the provision may inadvertently favor cooperatives over private grain buyers due to potential tax deductions for farmers. In short, the change cuts farmer taxes on proceeds from agricultural products sold to cooperatives.
According to a statement from the Ohio AgriBusiness Association: “A provision in the new tax law gives growers a better deal at tax time if they sell their agricultural products to co-ops rather than other types of companies. The provision will allow farmers to deduct up to 20% of their total gross sales to cooperatives, letting some farmers reduce their taxable income to zero. Farmers would get a smaller deduction — about 20% of income — if they sell grain or other farm products to privately held or investor-owned companies. Tax lawyers and accountants say the new law will give cooperatives a significant edge over competitors.”
This debate builds upon a battle last year in the development of the new tax legislation to preserve the Section 199 deduction for domestic production
“That deduction went away in the tax rewrite, but lawmakers including Sen. John Hoeven (R., N.D.) won the inclusion of the new deduction. Meant to compensate for the loss of Section 199, the new provision did not intend to put private firms at a disadvantage,” according to OABA.
The U.S. Department of Agriculture’s (USDA) Under Secretary for Marketing and Regulatory Programs Greg Ibach agreed and is supportive of addressing the issue.
“The aim of the Tax Cuts and Jobs Act was to spur economic growth across the entire American economy, including in the agricultural sector. While the goal was to preserve benefits in Section 199A for cooperatives and their patrons, the unintended consequences of the current language disadvantage the independent operators in the same industry,” Ibach said. “The federal tax code should not pick winners and losers in the marketplace. We applaud Congress for acknowledging and moving to correct the disparity, and our expectation is that a solution is forthcoming. USDA stands ready to assist in any way necessary.”
Numerous Senate offices, the Ohio AgriBusiness Association, the National Grain and Feed Association, and other agricultural groups are currently working on addressing the situation. In a joint statement from Chuck Conner, president and CEO of the National Council of Farmer Cooperatives, and Randy Gordon, president and CEO of the National Grain and Feed Association, they said the following: “We are working intensively with stakeholders, including cooperatives, non-cooperative-owned agribusinesses and Senate offices, including Senators Hoeven, Thune and Roberts. The goal of these discussions is to arrive at an equitable solution that preserves the benefits that cooperatives and their farmer patrons previously enjoyed under Section 199 of the tax code, while addressing any unforeseen impacts on producers’ marketing decisions. NCFC, NGFA and our stakeholders are committed to reaching a solution in a thoughtful and expeditious manner, and to working with Congress to address this issue promptly.”
It should be noted that any scenarios currently being considered are being done without any IRS rules in place. As the IRS develops the rules for the new tax laws the details (and complexities) of the tax language could change significantly.
“Without IRS guidance on this issue, it is impossible to know how these provisions will be interpreted,” said Kristine A. Tidgren at the Iowa State University Center for Agricultural Law and Taxation. “A plain reading of the text of the new law would suggest that it provides a significantly larger 199A deduction to some member farmers marketing their products through a cooperative than to farmers selling to a non-cooperative. But it is too early to tell if this interpretation will be implemented. Seemingly plain readings of the code are sometimes transformed by IRS regulation. It is also possible that Congress could ‘fix’ this provision. Section 199A(f)(4) instructs the Secretary of the Treasury to prescribe regulations necessary to ‘carry out the purposes’ of the law, including those ‘requiring or restricting the allocation of items’ under the law. Significantly disparate treatment of similar activities may warrant administrative consideration of the ‘purposes’ of the law.”
Technical corrections would require a politically challenging 60 votes in the Senate to make a change in the actual law.