Cooperative Tax Battle

Removing and Replacing Production Deduction Risks Benefits for Farmer Cooperatives

Chris Clayton
By  Chris Clayton , DTN Ag Policy Editor
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The Senate is advancing its tax bill to the floor for debate amid remaining issues affecting smaller businesses. That includes tax deductions affecting farmer cooperatives. (DTN file photo)

OMAHA (DTN) -- The head of the National Council of Farmer Cooperative is concerned about how tax law will treat a 17.4% tax deduction that could pass from cooperatives through to farmers but leave farmer cooperatives without the same financial benefit they now receive from the Section 199 Domestic Production Activities Deduction.

Senate Republicans worked Tuesday to ensure passage of a $1.41 trillion tax-cut bill by seeking changes that would shore up the benefits to small businesses. Amid denunciations from Democrats and a small but vocal protest breaking out during the business meeting, the Senate Budget Committee voted along party lines early Tuesday afternoon in Washington to merge some provisions from different committees in the tax bill and advance the bill to the Senate floor.

Sen. Charles Grassley, R-Iowa, told reporters Tuesday that a few key Republicans had indicated support for the tax bill, leading to just a few Republican senators who viewed the tax benefits for small businesses as not as attractive in the Senate bill compared to the tax cuts for larger corporations.

"That's the stumbling block we have to deal with right now," Grassley said. He added, "They know the necessity of getting a bill passed, and I don't know what it is going to take to satisfy them, but something's got to be done," Grassley said.

Touching on the benefits for small businesses, Grassley said the National Federation of Independent Businesses has sent a letter supporting the Senate bill, which NFIB did not do for the House bill.

One option is increasing the 17.4% deduction to something that gives equality with the corporate tax rate. The problem, Grassley said, is he could not provide an answer on how to offset the impact of making that change for small businesses. "What I can't answer is how to pay for it," Grassley said. "I can answer the first question -- bring more equality, but you got to pay for it."

Grassley added that farmers would see more benefit from immediate expensing of equipment and in doubling the estate tax exemption in the Senate bill, though Grassley said he still supports full elimination of the estate tax.

The National Council for Farmer Cooperatives has been vocal in trying to protect the Section 199 Domestic Production Activities Deduction, though the deduction would be eliminated in both the House and Senate versions of the bill. The 9% deduction is worth about $2 billion in deductions to farmer cooperatives nationally, some of which is retained by cooperatives and some of which is passed on to cooperative members.

"A lot of that money in recent years has been transferred back to the farmer, but it has also been used heavily at the co-op level, particularly at an earlier time when co-ops were needing to, for example, reinvest in processing and handling facilities. A lot of high-speed unloaders and grain storage in the Midwest and Upper Midwest has been built as a result of the (Section) 199 deduction," said Chuck Conner, president and CEO for the National Council of Farmer Cooperatives.

If the Section 199 is eliminated, the cooperatives are concerned that their ability to make capital investments would be hurt.

Instead of the Section 199, the Senate tax bill has a 17.4% tax deduction on pass-through income. Under that plan, farmers would receive the full benefit of the 17.4% under patronage dividends because there is no provision that would allow cooperatives to benefit from retaining some or all of the deduction.

"100% of the benefit would go to individual farmers," Grassley said.

Conner said the cooperatives are working closely with other agricultural interests to come up with a suitable situation that would allow cooperatives to make the decision whether to retain part or all of the deduction benefits.

Grassley said he and other senators are looking at the options. "It's my understanding that co-ops still want to retain the decision of whether or not this should be paid out or not," Grassley said. "We're still trying to satisfy that, and I'm not sure to what extent we can find a compromise, but it is something I'm committed to working on. We're still working on it with several other senators."

The 17.4% pass-through deduction would include deductions on income from a partnership, S Corporation or from being a sole proprietorship. As it is now in the Senate Finance Committee bill, the deduction is based on a percentage of business income. For single taxpayers with $250,000 in business income and married-filing-jointly taxpayers earning $500,000, the deduction would go against as much as 100% of wages paid by the business. Above those income levels, the deduction is limited to 50% of W-2 wages paid by the business.

The value of using the Section 199 at the cooperative level is that it can count against the wages of the cooperative. This benefits commodity producers who may not employ many or any other people.

"The beauty of the 199 was in the individual farmer to capture that labor expense on his individual operation even though it may have been at the cooperative level," Conner said. "The farmer themselves, on the farm, may not have that huge of a payroll. If that limitation applies, the 17.4% would be a very small benefit even for some larger operations out there."

Running some analysis of 17.4% deduction at the farmer level, farmers in the upper income brackets may be as well off under the 17.4% as the Section 199, Conner said.

"As you go down the income scale, the benefits are far less so," Conner said. "For a struggling farmer in a lower-income tax bracket, you would have been much better off with Section 199 than with the 17.4%. That's kind of our general analysis of it at this point."

Conner added that the NCFC position remains that Section 199 should be maintained. "It's time-tested, it's proven and it's been 100% effective for the goals Congress laid out for agriculture," Conner said.

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Chris Clayton