By Chris Clayton
DTN Ag Policy Editor
CHARLOTTE, N.C. (DTN) -- Leaders of the National Council of Farmer Cooperatives are optimistic IRS officials will adjust Section 199A(g) tax breaks after testimony this week from Treasury Secretary Steve Mnuchin.
Farmer cooperatives have been trying for more than two years to reestablish a tax deduction comparable to what they received before the 2017 tax law was passed. Last summer, the Treasury Department proposed rules that limited the Section 199A(g) deductions to patronage income, but the Treasury rule would eliminate cooperatives' ability to combine "non-patronage income" as part of the deduction calculation.
The tax complication came out of what was dubbed the "grain glitch" in early 2018 after it initially appeared the 2017 tax law made it much more lucrative for farmers to sell grain to farmer cooperatives than to private grain companies. Congress fixed the provision, but Treasury has been mired since then, trying to complete a rule to go along with the tax fix.
Under the complicated agreement passed by Congress, cooperatives got a special break under the Section 199A because they could not take advantage of the new lower corporate rates. The final agreed-upon deal was meant to reinstate a tax break cooperatives had used before the 2017 tax law.
The fix restored a deduction equal to 9% of a cooperative's income, limited to 50% of wages. The tax deduction can be retained or passed through to patron farmers. The farmer-patron of the cooperative could claim a Section 199A deduction equal to 20% of all net farm income, as well as any deduction passed on from the cooperative with a formula used to avoid double counting.
Then, Treasury officials came up with the idea of only allowing the tax break on patronage income and not non-patronage income, which was never part of the earlier tax break.
Cooperatives have been trying to draw attention to the real-world impact of not allowing non-patronage income as part of the deduction. As DTN reported last month, the inability to deduct non-patronage income would hurt any cooperative that has a significant business with anyone who is not a cooperative member.
Under the old rules, a farmer cooperative with 2,000 active members and 79.1 million bushels of delivery would receive a deduction of around $30 million in 2019. But under the proposed rule, the tax deduction drops to about $22.1 million. That's just under $8 million in tax deduction that the cooperative could lose, including not sharing the deduction with members. Dividing that lost deduction by the 79.1 mb equates to 10.1 cents a bushel of lost values, or $50,063 to the average farmer in the cooperative.
As NCFC noted, "The proposed IRS rule would increase taxable income for these farmers by $50,000."
Mnuchin commented during a congressional hearing on Tuesday that he is committed to working with members of the House Ways and Means Committee, as well as the Senate Finance Committee.
Chuck Conner, president and CEO of NCFC, stated that the farmer cooperatives' group appreciates Mnuchin's commitment to fix the grain glitch.
"Importantly, his statement that 'Our job is to implement the law; our job is not to make policy' is especially notable," Conner said. "It is clear that Congress intended Section 199A(g) to recreate the way that the Section 199 deduction worked under the old tax code. The current proposal from the Internal Revenue Service (IRS) fails to meet that standard in several important areas."
Thirteen members of the House Ways and Means Committee, the chair and ranking member of the House Agriculture Committee, and other members of Congress had written Mnuchin in recent months, asking him to ensure that the final regulations reflect the law, Conner noted.
"We trust that once he has had a chance to review the issue in its entirety and consult with those who wrote the law, Secretary Mnuchin will direct the IRS to implement the law as written and protect America's farmers and ranchers from a punishing tax increase," Conner said.
Chris Clayton can be reached at Chris.Clayton@dtn.com
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