Senators Look to Fix Clause in Tax Bill Which Favors Grain Sales to Co-ops01/11/2018
The tax bill that President Trump signed into law just before Christmas may be reopened to protect grain companies against the impact of a new deduction for members of farmer cooperatives.
Republican Sens. John Thune of South Dakota and John Hoeven of North Dakota, who helped write the co-op provisions in the tax bill, are now trying to revise the legislation to address complaints that the bill unfairly favors co-ops and their members.
Thune tells Agri-Pulse that the legislative fix would “dial back” the benefit to co-op members in order to extend it to farmers who sell their grain to other buyers. The new provision could be included in the big omnibus spending bill that lawmakers hope to pass next month to fund the government through the rest of the fiscal year.
“We’re going to try and remedy that and have different ideas about how to do that. More than likely it will ensure that everyone gets the same treatment,” he said.
Tax bill ‘went farther’ than intended
At issue is the new “199A deduction” that replaced the Section 199 domestic production deduction that was repealed by the new law. All small businesses are eligible for the new deduction, but it’s much more lucrative for co-op members.
In figuring their taxes, co-op members will be allowed to deduct 20 percent of all payments they receive from their co-op. For other farmers the 20-percent deduction will only apply to their taxable income. Hence, farmers would have a strong incentive to sell to co-ops instead of private or publicly traded grain companies.
Thune says the new deduction was “designed to mimic what they (cooperatives) got under Section 199, but it went farther than that,” Thune said. “We’re trying to negotiate with all of the people who are affected by this.”
The legislative fix is being written in a way that it would have no additional cost and could even save money, he says.
Deduction could make huge difference in taxes
Tax accountant Paul Neiffer, who warned about the unintended consequence of the deduction before the bill became law, has worked out an example to show that 199A could easily wipe out a co-op member’s taxable income.
For a farmer with $5 million in sales to a co-op and $4 million in expenses, the 20-percent deduction would be worth the entire $1 million in profit, leaving no taxable income.
But a farmer who isn’t a co-op member would have to take the 20-percent deduction against the $1 million in earnings, leaving taxable income of $800,000. The tax on that? $296,000.