OMAHA (DTN) -- Two years after discovering the "grain glitch" in the Tax Cuts and Jobs Act of 2017, leaders at farmer cooperatives are still trying to get Treasury officials to reinstate provisions of Section 199A to the way the tax deduction worked before the 2017 tax law passed.
A tax quirk two years ago looked like a windfall for farmers who did business with cooperatives. Now, new rules might actually increase the taxes for at least some farmers who are patrons of more diversified cooperatives.
"This is the issue that does seem to have a difficult time for us going away," said Chuck Conner, president and CEO of the National Council of Farmer Cooperatives.
Early in 2018, accountants and grain industry insiders discovered the new tax law -- which passed in December 2017 -- inadvertently gave farmers a potentially large tax break for selling their crops to farmer cooperatives instead of private elevators. Major private grain companies were immediately concerned about the purchasing disadvantage they could face. The grain glitch got enough attention that, within just a few months, Congress passed language to rework the tax deduction in a federal spending bill.
WHAT DEAL MEANT TO FIX
Cooperatives got a special break under Section 199A because they could not take advantage of the new lower corporate rates. The final agreed-upon deal was meant to reinstate a tax break cooperatives had used before the 2017 tax law. The fix restored a deduction equal to 9% of a cooperative's income, limited to 50% of wages. The tax deduction can be retained or passed through to patron farmers. The farmer-patron of the cooperative could claim a Section 199A deduction equal to 20% of all net farm income, as well as any deduction passed on from the cooperative with a formula used to avoid double counting.
All of that was fine until the Treasury Department began proposing rules last summer on how the deduction would work. Treasury officials proposed that the Section 199 deductions apply only to "patronage income," which would eliminate cooperatives' ability to combine "non-patronage income" as part of the deduction calculation. That exclusion of non-patronage income was never part of the original Section 199 regulations.
DIVERSE CO-OPS AFFECTED
Excluding non-patronage income wouldn't affect every cooperative, but diverse co-ops that have multiple businesses could lose that share of the tax break. That would then lower the potential tax break co-ops could return to their members.
"The report language in that correction bill was awfully prescriptive," Conner said. "I thought we were nailing down every loose edge imaginable when we passed that, to the point of being almost overly prescriptive. To change that now really disrupts a carefully thought through, and carefully crafted, compromise that all people signed off on."
Non-patronage income basically means revenue from sales to people who are not cooperative members, and it can come in different forms, such as sales from cooperatives operating rural gas stations, or selling products and services to farmers who are not part of the cooperative.
"It does not affect every co-op, but in many cases, it does impact on what they are able to pass through to the farmer and in some cases in a very, very sizable way," Conner said.
Conner noted the premise behind the 2017 tax law was to lower taxes, and excluding non-patronage income from the tax break would translate into many farmers seeing their taxes increase instead.
ISSUE RAISED IN JANUARY
The National Council of Farmer Cooperatives wrote Treasury Secretary Steven Mnuchin and members of the two tax-policy committees in Congress in late January to raise the issue as well. The group noted when lawmakers enacted the new Section 199A that Congress "made clear its intent that it should operate in the same manner as the former Section 199."
"We've been pushing on Treasury in various ways for the last several months to try to get to an understanding that this was a very carefully negotiated agreement," Conner said.
The NCFC letter was signed by the presidents and CEOs of several larger cooperatives nationally, including the top executives at CHS Inc., Land O' Lakes, Dairy Farmers of America and Ag Processing Inc., as well as leaders at some Farm Credit institutions.
Now, it's unclear when the Treasury Department will send a final rule back to the White House Office of Information and Regulatory Affairs for final review, but the expectation is that could happen as early as next week.
Members of Congress from both chambers have also written Mnuchin over the past month, raising concerns about how the department is interpreting the Section 199A fix. Reps. Collin Peterson, D-Minn., and Michael Conaway, R-Texas, the chairman and ranking member of the House Agriculture Committee, wrote Mnuchin, "We are concerned the Department's proposal appears to run contrary to the plain wording of the statute and our clear intent."
Peterson and Conaway added that, as the rulemaking advances, "It is imperative that the final regulations accurately reflect the intent of Congress and the negotiated agreement that we enshrined in statute."
Chris Clayton can be reached at Chris.Clayton@dtn.com
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