As the dust begins to settle on the Tax Cuts and Jobs Act being signed into law, there are some areas that are beginning to surface that will need to be addressed. One provision that is glaring in the eyes of privately-held or investor owned grain elevators: the 199A deduction.
The 199A provision inserted into tax code during Congressional negotiations gave farmers more lucrative deductions when they sell grain to cooperatives rather than privately-held or investor owned elevators.
Kristen Tidgren with the Center for Agricultural Law and Taxation at Iowa State University explains the deduction as follows:
“At its core, the § 199A deduction works like this:
(1) Subject to many limitations, taxpayers can generally take as a deduction, up to the amount of 20 percent of their taxable income (not including capital gain income), an amount equal to 20 percent of their “qualified business income.” (2) Additionally, taxpayers can generally deduct, up to the amount of their taxable income (not including capital gain income), an amount equal to 20 percent of their “qualified cooperative dividends.” Qualified cooperative dividends include patronage dividends and per unit retain distributions (grain sales to co-op).”
It is the difference between the two calculations and the limitations that apply to each respectively that are at the center of the debate. The difference in the deduction of 20 percent of qualified cooperative dividends is up to five times greater than the deduction of 20% of qualified business income.
Since its release, the controversy surrounding this provision has caught the attention of industry leaders and legislators. Senators John Hoeven and John Thune, responsible for the inclusion of the cooperative specific portion of 199A, have acknowledged their intent of the bill was to replicate the tax treatment previously available under former Section 199, not provide significant tax advantages to producers based on the type of company they sell their products to. Currently, members of the National Grain and Feed Association and National Council for Farmer Cooperatives are working with the senators to arrive at an equitable solution.
Until this happens, there are some points to consider if the law is enacted as written:
- Farmers may find themselves in the lower rather than higher tax brackets due to lower profits in a down agricultural economy. As a result, the Section 199A deduction under both scenarios equates to lower tax savings.
- Self-employment tax is not reduced by the Section 199A deduction which equates to about $15,000 for a farmer with $100,000 Schedule F net income up to about $52,000 for a farmer with $1 million Schedule F net income. This self-employment tax could be reduced by prepaying expenses or buying additional equipment.
- Transportation and storage costs need to be factored into the decision about selling grain to a cooperative versus non-co-op.
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.