Visit From The Grinch!
Which “Grinch” visited our coop clients this year? The one whose heart grows 3 times? Or the one who stole all the presents? Well, the answer is it will vary! The effects of the new tax law changes are still being contemplated (and debated) and you are likely getting inundated with information from many sources. We all agree that cooperative members appear to have been given a tremendous deduction related to the sales they make to a cooperative and the patronage dividends they receive. How much better for what they sell to a cooperative (as a member) versus selling to a non-cooperative entity (or a coop they are NOT a member of) will depend on each farmer/ producers individual circumstances. The cooperatives are the potential recipients of a competitive advantage because of the incentive to sell to a cooperative to garner a better deduction by the farmer/patron. Also, the Section 199A appear to allow non-commodity buying cooperatives access to this deduction; which they were not able to compute under Section 199.
On the flipside, depending on how much member business (PURPIMS) a cooperative has, the total deduction available to them may be greatly affected. Further, under Section 199, you had an option of keeping or allocating the deduction; under Section 199A, it remains at the coop. Any unused portion will be unable to be allocated, “dying at the coop”. There is likely to be an impact on allocable earnings, possibly lowering qualified patronage allocations. This will force discussions on how cooperatives should be capitalized. Or said another way, how we will keep the amount of unallocated earnings from continuing to grow, perhaps even faster (if your cooperative cares about that).
Regardless of which Grinch visited your cooperative, the new tax law changes appear better than we all thought we might get; which was just losing Section 199/DPAD, period. We look forward to addressing the impact on your cooperative over the coming year. In the meantime, feel free to reach out to us with any questions or concerns.