Farmer cooperatives and the grain and the feed industry announced a joint agreement to overhaul a new tax benefit for co-ops that gives farmers a strong incentive to sell commodities to them rather than to other companies.
The new provision, which would be retroactive to Jan.1, is designed to restore the treatment that cooperatives and their members received under the old Section 199 tax deduction that was repealed by the tax law that President Trump signed in December.
But the future of the deal between the National Council of Farmer Cooperatives and the National Grain and Feed Association was immediately put in some doubt when Senate Minority Leader Charles Schumer, D-N.Y., indicated Tuesday afternoon that he may object to including the Section 199A fix in a pending spending bill unless Republicans opened up other parts of the new tax law.
“What they did was very, very bad for our country, and we would welcome the opportunity to have a bipartisan agreement on changing some of the bad parts of that tax bill,” Schumer said.
Further clouding the issue, the National Farmers Union on Wednesday came out against the 199A fix on Wednesday, saying that co-op members should keep the benefit they received under the new tax law.
“To repeal parts of this important tax break would be to strike at the single most important benefit family farmers received from tax reform," said NFU President Roger Johnson. “Not only would corporations be better off, but farmers would be disadvantaged by working with their cooperatives.
The changes to the Section 199A provision that NCFC and NGFA agreed to would “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," the groups said in a joint statement.
The 20-percent Section 199A deduction was created by the tax law to ensure that pass-through businesses - partnerships, sole proprietorships and S corporations - received similar treatment to C corporations, which saw their top tax rate slashed from 35 percent to 21 percent under the bill.
The law provided a major advantage to co-ops, however, in that their farmers were allowed to deduct 20 percent of the value of their sales to cooperatives but only 20 percent of their net farm income when selling commodities to other buyers. The provision led some companies to explore reorganizing as cooperatives to take advantage of the provision. Some co-op members acknowledged that the 199A deduction would effectively wipe out their tax liability.
The old Section 199 domestic production activities deduction (DPAD) went to co-ops directly, although they passed most of the benefit on to members.
The new provision is intended to restore the benefit of the repealed deduction to “cooperatives and their patrons while providing some additional Section 199A deduction to farmers who sell to cooperatives,” said Paul Neiffer, an agricultural tax specialist with the accounting firm CliftonLarsonAllen.
Under the NCFC-NGFA agreement co-op members would no longer be allowed to deduct 20 percent of their sales. But farmers who only sell to co-ops would likely get a DPAD-like deduction that flows through from the cooperative. They would also get the 20 percent deduction from net farm income, minus either 9 percent of their net farm income, or 50 percent of the wages they paid, whichever amount is less, Neiffer said in a blog post.
Farmers who sell to both co-ops and other companies would have to keep the two income streams separate for calculating taxes, he said.
Greg Ibach, USDA's undersecretary for regulatory and marketing programs, issued a statement Wednesday offering to assist in GOP efforts to get the 199A fix included in the fiscal 2018 omnibus spending bill that Republican leaders hope to pass by the end of next week when a stopgap funding bill expires.
“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," Ibach said.
Randy Gordon, president and CEO of NGFA, said 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."
Chuck Conner, president and CEO of NCFC, said 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.”
Farms organized as C corporations would continue to be ineligible for the 199A deduction.
Read a summary and the text of the bill here.
(Updated 11:30 a.m. Wednesday with USDA statement.)
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