Under the newly approved Section 199A provision in the tax bill, farmers and ranchers will be able to take a 20% deduction off their business income, but the law does create what Roger McEowen, ag law and taxation professor at Washburn University School of Law, said could be a “knock-down, drag-out fight” between cooperatives who buy grain and private companies.
U.S. Department of Agriculture undersecretary for marketing and regulatory programs Greg Ibach said the aim of the Tax Cuts & Jobs Act is to spur economic growth across the entire American economy, including the agriculture sector.
"While the goal was to preserve benefits in Section 199A for cooperatives and their patrons, the unintended consequences of the current language disadvantage the independent operators in the same industry. The federal tax code should not pick winners and losers in the marketplace," Ibach said.
But winners and losers is exactly what would happen.
McEowen shared for products sold by a patron to a co-op, the patron’s deduction is 20% of the total payments received from the co-op, which is only limited by the taxpayer’s taxable income (less capital gain). For products not sold to a co-op (say, a private elevator), the deduction is 20% of net farm income. McEowen explained, in addition, for the taxpayer not selling to a co-op, their deduction could be limited by W-2 wages paid if their taxable income exceeds $315,000 (MFJ).
The provision will allow farmers to deduct up to 20% of their total gross sales to cooperatives, letting some farmers reduce their taxable income to zero. Farmers would get a smaller deduction—about 20% of income—if they sell grain or other farm products to privately held or investor-owned companies.
NGFA staff began meeting at the beginning of January with the tax staff from the offices of Sens. John Hoeven, R-N.D., and John Thune, R-S.D., who authored the provision. “At the time NGFA met with them, these senators' offices, too, were just beginning to be made aware that producers selling commodities solely to cooperative-owned businesses would be able to significantly reduce their federal income tax liability - to the point that it would influence where and with whom they market their products,” Randy Gordon, NGFA president and CEO, said in a notice to members.
It now appears the National Grain and Feed Association and National Council of Farmer Cooperatives have joined forces to try to again level the playing field for grain sales.
In a joint statement from Chuck Conner, NCFC president and CEO, and NGFA’s Gordon, the two said their organizations are working intensively with stakeholders, including cooperatives, non- cooperative-owned agribusinesses and Senate offices.
“The goal of these discussions is to arrive at an equitable solution that preserves the benefits that cooperatives and their farmer patrons previously enjoyed under Section 199 of the tax code, while addressing any unforeseen impacts on producers’ marketing decisions,” Conner and Gordon said.
“NCFC, NGFA and our stakeholders are committed to reaching a solution in a thoughtful and expeditious manner, and to working with Congress to address this issue promptly,” the statement added.
Gordon said the work was scheduled to begin on Jan. 12.
Ibach applauded Congress for acknowledging and moving to correct the disparity. “Our expectation is that a solution is forthcoming. USDA stands ready to assist in any way necessary.”