Grain companies mull impacts of tax-law shift that benefits cooperatives
US grain companies are considering the potential impacts of a provision in the tax reform package that provides a tax benefit to farmers that market their grain through a cooperative, and some are concluding it will give co-ops a big advantage.
Included in the tax-reform measure was a new section – 199A – that provides farmers the ability to deduct up to 20 percent of their total sales to cooperatives. It is a more-generous version of a deduction that owners of pass-through businesses, such as partnerships and S-corporations, get in the law. Farmers would get a smaller deduction — about 20 percent of their profit — if they sell grain or other farm products to privately held or investor-owned companies.
The Wall Street Journal detailed an example of the potential impact: "Consider a simplified example of a wheat farmer with $500,000 in annual grain sales and $80,000 in profit. A farmer selling grain to a cooperative could deduct 20% of sales, wiping out the entire income-tax liability. By contrast, if the farmer sells grain to an independent grain operator, the farmer’s deduction would be limited to 20% of the profit, or $16,000, leaving that farmer with up to $64,000 in taxable income."
Major grain companies are concerned this will steer business toward cooperatives and make it harder for them to source grain for ethanol production, exports and more. Officials from Cargill, ADM and others signaled they are looking at the provision to determine the potential impacts and how they can respond. Others note this could force private grain firms to buy grain from the cooperatives, potentially raising their cost.
One of the lawmakers championing the provision was Sen. John Hoeven (R-N.D.), and his office indicated they are looking at the situation. The goal of the provision in the tax plan was to make sure cooperatives were not being "unfairly treated," said Hoeven spokeswoman Kami Capener. "We are looking into any unintentional impacts to non-cooperative [grain] elevators and will work with them to address it."
Reports indicate some of the non-cooperative grain operations have already received inquiries on moving their grain stored in those facilities to cooperatives.
The National Council of Farmer Cooperatives (NCFC) also led efforts to get the provision in the tax reform plan, as they sought to address the impact of losing the Section 199 component of the tax law, arguing it was a tax increase on farmers. "The producer/member deduction is more generous than most of us thought possible a few months ago," NCFC President Chuck Conner told members in a message. “Looking forward, we believe that Congress should avoid any action that would raise taxes on farmers, especially at a time of continued low commodity prices.” Conner also noted the group is getting a lot of calls from those wanting to start a cooperative and inquiries from those in the private agribusiness sector "hoping they have misread the producer provisions."
Tax experts note that the guidance from the Internal Revenue Service (IRS) on the provision will also be key in determining the exact impact.
Republicans have already signaled there will be a technical corrections package for the tax reform plan. But to make changes in the measure, it could take 60 votes.