Update on Section 199A Tax Deduction
Shortly after Congress passed its Tax Cuts & Jobs Act (TCJA) ahead of Christmas, it quickly became known that one of the provisions — Section 199A, which is designed
to give tax relief to small business and pass-through entities to specifically benefit farmers — may actually create an uneven playing field.
The language in Section 199A gives producers who market grain a significant incentive to sell to a cooperative rather than a non-cooperative firm. Under the new tax reform bill, large corporations receive a significant tax cut (a permanent 40% reduction — from a 35% rate to 21%), but a previous benefit — referred to as the Domestic Production Activities Deduction (DPAD) — was eliminated, and it affects many businesses, including farmers.
Currently, 199A provides an advantage to cooperatives over non-cooperative farmers. This could disadvantage small, independent grain elevators and large companies like Archer Daniels Midland (ADM) and Cargill.
The National Grain & Feed Assn. and the National Council of Farmer Cooperatives(NCFC), explained that the intent of Congress for including this provision was to replicate the tax treatment previously available to co-op farmer-members. The groups continue to work with members of Congress for a solution that restores the competitive balance that existed before the tax bill was passed and that replicates the benefits of the previous Section 199 for co-ops and producers.
Their hope is that a solution will be included in the next continuing resolution to fund government operations, which will need to be acted on by Feb. 8 to avoid another government shutdown, according to an industry official party to the discussions.
Iowa State University economist Keri Jacobs said Section 199A allows producers selling grain to receive a 20% deduction of gross grain sales (before farm expenses) from taxable income less capital gains if they are a member selling to a cooperative. If the sale is instead to a non-cooperative marketing firm or processor (e.g., ADM, Cargill or any number of independent grain marketing firms), the deduction is 20% of net income.
“At the surface, this creates a significant effective basis gap between otherwise equal basis bids for grain or other agricultural commodities,” she explained in a recent review of the provision .
Jacobs explained that for a farmer who has $500,000 in gross grain sales (140,000 bu.) and $100,000 in net farm income, all from selling grain, if he or she markets through a cooperative, the anticipated patronage allocation would be $0.025 cents/bu., or $3,500. If that farmer markets the crop to an independent grain firm or processor and, through Section 199A, deducts up to 20% of QBI, it would offer a potential $20,000 deduction (20% x $100,000). However, if that farmer markets the crop to a cooperative, he or she can deduct up to 20% of gross sales (20% x $500,000 = $100,000) because they qualify as per unit retains, plus 20% of any qualified patronage allocation (20% x $3,500 = $700); the potential deduction would be $100,700.
“At a 22% marginal tax rate based on selling to an independent marketing firm or processor, the deduction difference between these two choices is $80,700, which equates to $0.12/bu. in taxes. Estimates from tax professionals working with producers is that the tax effect may range from $0.05 – $0.20/bu.,” Jacobs explained.
NGFA continues to press for expeditious, equitable solution to Section 199A tax issue
By Randy Gordon, President
In the Jan. 17 edition of the NGFA Newsletter, I updated NGFA members that your association was working hard and collaboratively to develop an equitable and expeditious solution to the unforeseen marketing-disruptive impacts created by Section 199A of the Tax Cuts and Jobs Act.
During the ensuing weeks, those efforts have only intensified. And we are entering an important new phase in the coming week.
To recap, as noted in the Jan. 12 NGFA Member Alert, the NGFA’s goal throughout this process has been two-fold: 1) to restore the competitive marketplace landscape that existed before the Dec. 22 enactment of Section 199A by correcting its unintended consequences to restore a competitive marketplace and marketing choices for agricultural producers; and 2) to replicate the tax benefits accorded to cooperatives and their farmer-patrons under Section 199 that existed prior to enactment of Section 199A. NGFA also consistently has conveyed to Congress that the need to develop and enact an equitable legislative solution is urgent, given tax code-driven distortions in marketing behavior by producers, delayed capital investments by companies and, in some cases, restructuring of companies that already are occurring in response to what all parties concede were the unintended consequences of Section 199A. Indeed, it is not equitable to agricultural producers, cooperatives or private/independent firms to continue to operate in a period of uncertainty.
As an organization comprised of almost equal numbers of farmer-owned cooperative and private/independent company members, the NGFA currently is tapping into top tax expertise of both segments of its membership to advise Congress on key features of Section 199 that need to be replicated as part of any legislative solution, and which do so in a way that restores a competitive balance in the marketplace. This internal review and analysis within NGFA has been informed by nearly two weeks of nearly daily discussions and interaction with tax experts from the National Council of Farmer Cooperatives (NCFC), one of the outcomes from the joint statement NCFC President and CEO Chuck Conner and I issued on Jan. 11.
So, what’s the status? It is important to note that tax staff members of the Senate Finance Committee, in consultation with the House Ways and Means Committee, already have begun drafting legislative language to enact a solution. The Joint House-Senate Committee on Taxation also will be engaged in an effort to ensure that a legislative solution to this complex issue is done correctly this time around. Importantly, NGFA has been asked by these key congressional tax-writing committees to continue to stay fully engaged and to serve as a sounding board to vet key policy questions – again, a recognition of our balanced membership composition and a responsibility that NGFA willingly accepts on behalf of its member companies’ interests.
How soon can a legislative solution be enacted by Congress? Congressional staff and NGFA are focused on attaching a legislative correction to Section 199A to what likely will be one or more stop-gap spending bills to continue funding federal government operations. The first of these legislative vehicles currently is due to be considered on Feb. 8, with one or more spending bill opportunities also likely to occur between then and early March. It goes without saying that our preference is sooner rather than later!
This forward momentum also is being driven hard by several senatorial offices – including those of Sens. John Thune, R-S.D., Pat Roberts, R-Kan., and Charles Grassley, R-Iowa, each of whom serve on the Senate Finance Committee – as well as Sens. John Hoeven, R-N.D., Mike Rounds, R-S.D., and Jerry Moran, R-Kan. These key senators, the U.S. Department of Agriculture and more have stated publicly that Section 199A needs to be fixed. You can read several of their statements here. NGFA also has developed a special section of its website that contains an NGFA one-pager on this issue and the importance of enacting an equitable solution quickly.
Bottom line, NGFA is working hard with Congress and other stakeholders to enact a solution to the Section 199A tax problem that is fact-based, fair and within the scope of replicating the tax treatment accorded agricultural cooperatives and their farmer-patrons under the previous Section 199 of the tax code. That was the assignment given to NGFA, NCFC and other stakeholders by senators and congressional tax staff members when this work began. That charge from Congress has not changed nor has NGFA deviated from it.