USDA, Grain, Feed and Cooperative Groups Want Fix to Avoid Market Distortion by Tax Code


WASHINGTON, D.C. (DTN) — Intensity has heightened to find a legislative solution to new tax code benefits for farmer cooperatives under Section 199A which could direct agricultural sales away from private companies.

Tax analysts said the new tax law potentially could significantly skew producers' decision on which type of business entity with which to market their commodities. (DTN/The Progressive Farmer photo by Jim Patrico)
On Friday, USDA Undersecretary for Marketing and Regulatory Programs Greg Ibach issued the following statement, noting the unintended consequences and concern some ag stakeholders have expressed about the section's impact on the grain business.

“The aim of the Tax Cuts and Jobs Act was to spur economic growth across the entire American economy, including in the agricultural sector,” Ibach said. “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. We applaud Congress for acknowledging and moving to correct the disparity, and our expectation is that a solution is forthcoming. USDA stands ready to assist in any way necessary.”

Randy Gordon, president and CEO of the National Grain and Feed Association, also sent out a member alert explaining what the group has been doing to deal with the situation. NGFA, which has members that are both independent businesses and farmer cooperatives, did not lobby on the issue before the tax law was passed, and was not privy to the language in the final bill, Gordon stated. Once aware of the situation, Gordon said NGFA staff began receiving information from tax analysts that the Section 199A language had been written in a way “that potentially could significantly skew producers' decision on which type of business entity with which to market their commodities.”

The provision in the law allows farmers to take advantage of the new 20{ff5548eb8b7551781742a29b9864cd1703b3791f37ac9790ae42b0c6a6bb7d63} deduction on all qualified business income, like every other smaller business, but on top of that, farmers can deduct, “up to the amount of their taxable income (not including capital gain income) an amount equal to 20{ff5548eb8b7551781742a29b9864cd1703b3791f37ac9790ae42b0c6a6bb7d63} of their 'qualified cooperative dividends.'”

The deduction for qualified cooperative dividends allows a taxpayer to deduct the lesser of “20{ff5548eb8b7551781742a29b9864cd1703b3791f37ac9790ae42b0c6a6bb7d63} of the aggregate amount of the qualified cooperative dividends of the taxpayer for the taxable year, or, taxable income minus net capital gain.”

As different tax experts have noted, the difference for a farmer who is a cooperative member and selling grain to a cooperative versus a private grain company, for instance, could dramatically lower their taxable income at the end of the year. In some instances, farmers could end up with zero taxable income simply by choosing to market all of their commodities to cooperatives versus private companies.

While much of the emphasis has been on the impact in grains, the provision applies to all agricultural cooperatives.

The new Section 199A could be a major potential business advantage for cooperatives, depending on how the IRS writes the rules or guidance. Without revision, the language of the tax bill would not only prompt farmers to sell larger shares of the commodities to cooperatives, but also force private companies to create more cooperative entities of their own.

Gordon wrote in his member alert that NGFA staff have been meeting with staff from Sens. John Hoeven, R-N.D., and John Thune, R-S.D., who also were just beginning to understand the full ramifications of the tax-law change. Gordon noted, “Both senators' offices emphasized that the language was intended solely to replicate the tax treatment previously available to co-op farmer-members commensurate with the former Section 199 that was being deleted from the tax bill, and was never intended to provide a significant tax advantage to producers based on the type of company to which they sold their commodities.”

NGFA's executive committee directed the group to work with Congress, the National Council of Farmer Cooperatives and other stakeholders to deal with the unintended consequences of the new Section 199A which “replicated the tax treatment previously available to co-op farmer members under the previous Section 199, but does so in a way that restores a level playing field and does not provide a tax-based incentive that influences farmers' marketing decisions.”

As recently as Thursday, organizations and company staffs met again with congressional staff from Hoeven and Thunes' offices as well as Senate Agriculture Committee Chairman Pat Roberts, R-Kan., and several other senators.

NGFA's Gordon and Chuck Conner, president and CEO of the National Council of Farmer Cooperatives, issued a joint statement on Friday as well. The two noted, “We are aware of questions and concerns raised about the potential marketplace effects of the new section 199A of the Tax Cuts and Jobs Act as it relates to producers and agribusinesses. Congress' intent in including this provision was to replicate the tax treatment previously available to co-op farmer-members, consistent with the bill's overarching goal of creating jobs and economic growth including in rural America.”

The statement by Gordon and Conner also reiterated they are “working intensely” with others, including the senators, to resolve the issues. “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.”

So far, however, there have been no statements indicating work or concern about the issue with the House of Representatives. Another potential problem with a legislative fix is that it may demand a vote of 60 senators to pass legislation dealing with the problem.

Chris Clayton can be reached at

Follow him on Twitter @ChrisClaytonDTN


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