WASHINGTON – Both cooperatives and privately-owned grain buyers have expressed support for a proposed fix to what was broadly seen as an error in tax law revisions passed late in 2017 that unintentionally had given significant tax advantages to farmers who sold their products to cooperatives.
The “fix” calls for repealing the tax law change that gave farmers a 20% deduction off their gross sales when selling to cooperatives and restoring the tax benefits cooperatives and their members had under the old tax code, which provided for a 20% deduction on net business income with limits on high incomes and capital gains. The proposal would be retroactive to start of the 2018 tax year on Jan. 1 to negate gains that may have resulted from the error since the new tax law took effect.
According to press reports, Republicans want the fix included in the fiscal 2018 Omnibus spending package, which must be passed by March 23, although it was not certain Democrats would agree to that procedure or timing.
The National Council of Farmer Cooperatives (N.C.F.C.) and the National Grain and Feed Association (N.G.F.A.), the latter of which represents both cooperative and independent members, issued a joint statement in support of the changes, which they said warranted bipartisan support, and for including the legislation in the Omnibus bill.
A provision in the new tax law – Section 199A – gave farmers more favorable tax deductions when they sold agricultural commodities directly to cooperatives than when they sold to privately held elevators, mills, ethanol plants or other businesses.
The provision was inserted into the tax bill late in the legislative process to offset the loss of a significant pass-through benefit with the removal of Section 199, known as the Domestic Production Activities Deduction. The new Section 199A was intended to provide benefits similar to those gained by manufacturers in the new tax law. Because of the way the new law was written, Section 199A allowed farmers to deduct up to 20% of their total sales to cooperatives, resulting in zero taxable income in some cases, but allowed them to deduct only 20% of income when they sold to privately held or investor-owned companies. Previously, cooperatives and privately held companies were on equal footing when competing to buy grain.
The fix is intended “to replicate to the greatest extent possible the tax benefits according to farmer-owned cooperatives and their farmer-patrons under the previous Section 199 … as it existed prior to its repeal in the Tax Cuts and Jobs Act enacted on Dec. 23, 2017, and to 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 N.C.F.C. and the N.G.F.A. said.
The tax law as it was written was seen as having a significant impact on farmers’ selling of agricultural commodities.
“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,” said Randy Gordon, N.G.F.A. president and chief executive officer. “But the stakeholder concepts on which this legislative language is based have been analyzed and reanalyzed in excruciating detail by tax exports 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.”The N.C.F.C. and the N.G.F.A. expressed their appreciation to House Ways and Means Committee Chairman Kevin Brady of Texas, Senate Finance Committee Chairman Orrin Hatch of Utah and the Congressional Joint Committee on Taxation for developing the language designed to achieve a fix for the tax law.