Resolution on Section 199A

Proposal Floated Would Satisfy Cooperatives, Grain Elevator Groups

Chris Clayton
By  Chris Clayton , DTN Ag Policy Editor
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Under a tax change proposed by groups representing grain elevators, delivering to a cooperative would still provide a tax benefit over selling to a private company, but the tax break won't be as lucrative. (DTN file photo)

OMAHA (DTN) -- Two major agricultural groups announced a proposal on Tuesday to roll back the Section 199A tax-break deduction that has upended grain trade.

The National Grain and Feed Association and National Council of Farmer Cooperatives support a plan that would replace the 20% deduction on gross sales to cooperatives with a tax deduction more comparable to the original Section 199 deduction, known as the Domestic Production Activities Deduction.

If approved by Congress, a farmer selling to a cooperative would still see a tax benefit over selling to a private company, but the tax break won't be as lucrative. The new tax provision also would be retroactive to Jan. 1, 2018, which would effectively nullify any significant tax savings farmers believe they were going to gain by exclusively selling to grain cooperatives.

NGFA and NCFC called on lawmakers to include their plan in a federal appropriations bill this month, stating that they believe their proposal warrants bipartisan support. The groups cited that House Ways & Means Chairman Kevin Brady, R-Texas, Senate Finance Committee Chairman Orrin Hatch, R-Utah, and the Joint Committee on Taxation crafted language over the past week that "replicated to the greatest extent possible the tax benefits accorded to farmer-owned cooperatives and their farmer-patrons under the previous Section 199, known as the Domestic Production Activities Deduction (DPAD)." Further, the resetting of Section 199 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."

Within days after the Tax Cuts and Jobs Act went into effect, tax accountants began pointing out the language of the new Section 199A that created a significant tax advantage for farmers who are members and sell their commodities to cooperatives. The tax break essentially gave farmers a 20% deduction on gross sales. The situation since then has become such that some private companies started creating their own cooperatives just to compete on a fair basis with existing cooperatives. Grain businesses also were noting a decline in farmer forward contracts because of the deduction.

The complications were heightened with reports in recent weeks that various other business industries were looking at cooperative models because of the tax breaks included in Section 199A.

While dealing with the unintended consequences of the tax law change, some farmers who already sell exclusively to cooperatives or sold higher volumes to cooperatives will find themselves without the windfall they had hoped. At least a few farm organizations at the state level had called on Congress to keep the higher deduction for cooperatives in place because of the challenging overall farm economy.

The joint support and sign-off of legislation by the leading organizations representing farmer cooperatives and private grain companies would nullify the idea of a farmer getting a tax break on 20% of gross sales to a cooperative.

Under the draft legislation, the 20% gross sales language would be repealed and parts of the old Section 199 DPAD would be restored.

Changes would be made to the farmer-level 20% deduction on qualified business income, which all non-corporate taxpayers received under the new tax law. Farmers who do businesses with cooperatives would see their 20% deduction reduced by either 9% of qualified income subject to such sales, or 50% of the farmer's wages allocable to such sales. The farmer would then add any pass-through from the co-op on the new Section 199 back in as a deduction. The total farmer-patron deduction would be the pass-through deduction from the cooperative, plus the modified 20% deduction.

So the new change retains a benefit for selling to a cooperative, but it isn't simple.

The draft language also notes that farms structured as a C corporation would not be eligible for the 20% pass-through deduction because of the language in the new law.

NCFC had repeatedly expressed concern before the tax bill was completed that farmers and cooperatives would lose out if the DPAD was eliminated outright. A key goal in writing Section 199A was trying to ensure farmers and cooperatives maintained a similar tax break as before.

Chuck Conner, president and CEO of NCFC, said farmers would still see significant tax savings under the new agreement -- 20% of taxable income -- but not as lucrative as 20% on gross sales.

"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," Conner said. "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% 199A pass-through deduction."

Randy Gordon, president and CEO of NGFA, said care was taken to craft new language that would provide tax relief to farmers but also restore "to the maximum extent possible the competitive balance in the marketplace." NGFA represents both businesses and cooperatives in the grain and feed industry.

"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."

Both groups thanked several senators, including Sens. John Hoeven, R-N.D., and John Thune, R-S.D., who crafted the original language, but sought to quickly correct it. Sens. Chuck Grassley, R-Iowa, and Senate Agriculture Committee Chairman Pat Roberts, R-Kan., were also involved, as were several unnamed Democratic senators who want to see the issue resolved, the groups stated.

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Chris Clayton