Many legislators from agricultural states like Iowa have been fighting to fix an unintended consequence that was written in the 199A tax provision giving farmers a tax incentive to sell their products to cooperatives over other types of businesses, like private elevators.
The Omnibus budget bill that was passed on Friday, March 23 will fund the government for the remainder of the fiscal year, through September 30 and provided provisions to fix the so-called grain glitch.
The amendments included in the bill will do the following:
- Eliminate the deduction of 20% of gross sales to cooperatives (previously enacted under the tax reform act in late December 2017).
- Restore prior-law Section 199 treatment for cooperatives and allow patrons to claim a deduction passed through from a cooperative.
- Cooperatives will be entitled a deduction of 9% of the lesser of (1) qualified production activities deduction (QPAI) or (2) taxable income. Taxable income and QPAI will continue to be computed without regard to any deduction relating to patronage dividends, per-unit retains, and non-patronage distributions, similar to the former rules of Section 199. The deduction will be limited to 50% of wages and can be retained or passed through to the members of the cooperative.
- Change the farmer-level deduction to 20% of taxable income or qualified business income (in line with all other non-corporate taxpayers), with limitations for farmers with high taxable incomes or capital gains.
- Farmers who transact with a cooperative will also be subject to the following:
- The 20% deduction will be reduced by the lesser of (1) 9% of qualified business income allocable to such sales, or (2) 50% of wages allocable to such sales.
- This reduction applies regardless of the amount of Section 199A deduction passed through by the cooperative and is intended to replicate the deduction the farmer had foregone by dealing with the cooperative under prior-law section 199.
- The co-op member’s total deduction for the year will be the pass-through deduction plus the modified 20% deduction.
C corporations are not eligible for the 199A deduction so producers may want to consider ownership restructuring in light of this restriction. The changes to Section 199A are retroactive to January 1, 2018.
The BerganKDV agricultural team will continue to closely follow the situation as it unfolds and will reach out as more information is available. In the meantime, if you have questions about your individual situation, please contact us.