Shortly after Congress passed its Tax Cuts & Jobs Act (TCJA) ahead of Christmas, it quickly became known that one of the provisions -- Section 199A, which is designed to give tax relief to small business and pass-through entities to specifically benefit farmers -- may actually create an uneven playing field.
The language in Section 199A gives producers who market grain a significant incentive to sell to a cooperative rather than a non-cooperative firm. Under the new tax reform bill, large corporations receive a significant tax cut (a permanent 40% reduction -- from a 35% rate to 21%), but a previous benefit -- referred to as the Domestic Production Activities Deduction (DPAD) -- was eliminated, and it affects many businesses, including farmers.
Currently, 199A provides an advantage to cooperatives over non-cooperative farmers. This could disadvantage small, independent grain elevators and large companies like Archer Daniels Midland (ADM) and Cargill.
The National Grain & Feed Assn. and the National Council of Farmer Cooperatives (NCFC), explained that the intent of Congress for including this provision was to replicate the tax treatment previously available to co-op farmer-members. The groups continue to work with members of Congress for a solution that restores the competitive balance that existed before the tax bill was passed and that replicates the benefits of the previous Section 199 for co-ops and producers.
Their hope is that a solution will be included in the next continuing resolution to fund government operations, which will need to be acted on by Feb. 8 to avoid another government shutdown, according to an industry official party to the discussions.
Iowa State University economist Keri Jacobs said Section 199A allows producers selling grain to receive a 20% deduction of gross grain sales (before farm expenses) from taxable income less capital gains if they are a member selling to a cooperative. If the sale is instead to a non-cooperative marketing firm or processor (e.g., ADM, Cargill or any number of independent grain marketing firms), the deduction is 20% of net income.
“At the surface, this creates a significant effective basis gap between otherwise equal basis bids for grain or other agricultural commodities,” she explained in a recent review of the provision.
Jacobs explained that for a farmer who has $500,000 in gross grain sales (140,000 bu.) and $100,000 in net farm income, all from selling grain, if he or she markets through a cooperative, the anticipated patronage allocation would be $0.025 cents/bu., or $3,500. If that farmer markets the crop to an independent grain firm or processor and, through Section 199A, deducts up to 20% of QBI, it would offer a potential $20,000 deduction (20% x $100,000). However, if that farmer markets the crop to a cooperative, he or she can deduct up to 20% of gross sales (20% x $500,000 = $100,000) because they qualify as per unit retains, plus 20% of any qualified patronage allocation (20% x $3,500 = $700); the potential deduction would be $100,700.
“At a 22% marginal tax rate based on selling to an independent marketing firm or processor, the deduction difference between these two choices is $80,700, which equates to $0.12/bu. in taxes. Estimates from tax professionals working with producers is that the tax effect may range from $0.05 - $0.20/bu.,” Jacobs explained.
Efforts to keep Section 199A have garnered a lot of support. A new website (http://standforfarmers.com) – Stand for Farmers – also was recently launched to help farmers voice their support to Congress and sign a petition.
Not all parties agree on a fix. The Stand for Farmers website said some believe the fix is to do away with the positive and unique farm provisions in 199A altogether, while others say 199A should be should be repealed and the old section 199 re-enacted. “Both are unacceptable. Either would put cooperatives and farmer members at a big disadvantage under the new tax law, which still confers a 40% reduction in rates for corporate structures,” the website’s Q&A section noted.
Mike McCloskey, leader of Select Milk Producers, a dairy cooperative owned by its family dairy farmer members, is asking farmers to join forces with their purchasers (co-ops and independent commodity buyers) to contact their senators and representatives to support Section 199A for all farm interests.
McCloskey noted in a recent op-ed, “Many legislators are now looking for political cover, because leaving out non-cooperative companies created a ‘have and have not’ scenario. This could, in turn, create an imbalance in agriculture markets, putting large, independent buyers of farm products at a disadvantage to farmer co-ops. As a family farmer, I believe in fairness, and I agree that this must be corrected – but not by undercutting our ability to compete against the stacked deck of global competition. Instead, the entire farming community should be included in Section 199A.”