Category Archives: Section 199
With their letter dated August 19, 2009, AGP announced their intent to take advantage of the enhanced section 199 deduction effective with their current fiscal year ended August 31, 2009. They will now be computing their section 199 deduction in accordance with the prescribed manner that Gardiner Thomsen brought to you last year.
So, what is the benefit? This could allow your cooperative to pass the section 199 deduction through to your members, which enhances their cooperative patronage. This could allow the cooperative to reduce its qualified patronage allocation, which allows the cooperative to retain equity, thereby strengthening the balance sheet. And there is no question that it would generate a Federal Net Operating Loss which can be carried over for 20 years (under current law) which would provide for virtually unlimited income tax planning to minimize your Federal (and in some cases State) income tax. In laymen’s terms, it would generate additional working capital for the cooperative– potentially an increase in working capital of millions of dollars.
As we all know, tax laws change frequently. Under current law, we can compute and deduct (or allocate to your members) this section 199 deduction. In fact, this deduction even increases for tax year 2009 to 9% of adjusted taxable income before PURPIMs and allocated qualified patronage (currently 6%).
We feel that this ruling, coupled with IRS instructions regarding effective dates of electing the enhanced section 199 calculation, provide a clear authority to amending cooperative returns for purposes of computing and deducting the larger section 199 deduction.
Since the IRS issued Internal Legal Memorandum 200806011 in early 2008, which provided guidance on computing the section 199 deduction for both pooling and non-pooling cooperatives, we at Gardiner Thomsen have spent many hours researching this issue to provide the best possible tax service to our cooperative clients.
Last year, based on IRS guidance, we changed the way that Section 199 was computed. This year we are researching the Internal Revenue Code, specifically sections 1381, 1382 and 1383, which are related to Section 199, to investigate the possibility of writing down your tax basis member grain inventory (in dollars) to zero. This would have the affect of creating a tax deduction equal to your ending member grain inventory.
So far, there have been several private letter rulings dealing with section 199. These rulings have been issued on pooling cooperatives, although a thorough review of the facts indicates that all of the cooperatives involved have been conducting their business like non-pooling marketing cooperatives and are pooling cooperatives in name only.
By that we mean, continue to utilize at the Cooperative level, pass the benefit through to the patron or a combination of both. We envision recommending some alternatives that will utilize non-qualified patronage allocations also. Our goal is to help you further strengthen your balance sheets and manage your members’ equity to best fit your situation or long-term plans.
As 2008 draws into the home stretch, we at Gardiner Thomsen wanted to review some major new tax and reporting issues with you. There have been several exciting new changes and credits that have recently been enacted and we want to encourage you to take advantage of these benefits.