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Tax Bill Gives Advantage To Cooperatives

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A loophole in the new tax reform bill gives cooperatives a significant advantage over private grain handling businesses and Congress is trying to work out the consequences.

At the end of last year, the Tax Cuts and Jobs Act was signed into law. Farm groups tried to keep a little known cooperative deduction, called section 199, which ended up failing. Instead, a new section 199A replaced it.

Kristine Tidgren with the ISU Center for Ag Law and Taxation says, "It's a benefit for pass-through businesses, so farmers who sell grain, you know the idea is let's give them a special deduction, a break on their taxes."

However, after it's passage, accountants and law experts began to sift through the bill. They found the wording of the new law concerning.

If a farmer sold to a coop, they could deduct 20 percent from their gross income. But if they sold to a private location, the 20 percent deduction only works on their net income. The slight difference in wording is enough that private operations could potentially be put out of business.

Tidgren says it's apparent now that the result was unintentional.

Not long after this became known, government officials began to respond. Iowa Senator Joni Ernst cosponsored a bill that would have left section 199 as it was originally. Instead, the conference committee released 199A.

Ernst says, "There are concerns regarding this provision, especially when it comes to private businesses or private agribusiness's and so we are currently looking at a path forward and I am committed to making sure that we get this provision right. And so that both our cooperatives and our private ag companies can thrive under the new law."

Iowa Senator Chuck Grassley says, "[The bill has] got to be corrected, and it's going to be corrected."

In a statement from the USDA, Under Secretary for Marketing and Regulatory Programs Greg Ibach says the USDA stands ready to assist in any way, "The aim of the Tax Cuts and Jobs Act was to spur economic growth across the entire American economy, including in the agricultural sector. 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 two Republican senators who crafted the new provision 199A, John Hoeven and John Thune, told Bloomberg the outcome for coops was unintentional.

In addition, the National Council of Farmer Cooperatives and the National Grain and Feed Association released a joint statement where the say the intent of Congress was to replicate older tax treatment.

Tidgren says, "There has been fairly strong agreement that the government really shouldn't pick winners and losers and I think there's not a lot of debate about that, the question is what can be done to fix it."

There are a couple options according to Tidgren, a technical corrections bill could be implemented down the road or language could be added into a continuing resolution bill, which Congress needs to pass to keep the government running.