Another Opportunity To Save BIG!
By: Charles L. Telk Jr., CPA, Senior Tax Adviser | email
To anyone who thinks that cooperative taxation is a boring area, we say that you are grossly mistaken! Increasing the amount of money that section 199 has saved your cooperative is not boring– it’s exciting! Although, we are accountants and do realize that our idea of exciting is not always mainstream... however saving money is almost always exciting– especially BIG money!
In addition to computing how section 199 will benefit your cooperative this tax year, and investigating the benefits of amending past years’ returns, we are also working on (what we call) the section 1383 zero inventory issue.
The logic is, if a grain payment (for Federal income tax purposes) is not a purchase, then it is not inventory. And if it is not inventory, then you cannot have inventory. If you cannot have inventory, then your ending member grain inventory must be zero for Federal income tax purposes!
While this is somewhat confusing, we have heard that a “Big 4” international firm is filing cooperative tax returns making this argument. In fact, they may even have contacted you regarding this issue. What’s the point? With no ending inventory, you would have a tax deduction roughly equal to your GAAP basis member grain ending inventory– in other words, a tax deduction many times larger than your section 199 deduction. This could potentially mean tens of millions of dollars in savings. That is a big number.
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.
We are in the process of evaluating how this issue applies to your cooperative. Rest assured that we at Gardiner Thomsen continue to investigate ways in which to save our clients as much tax (and therefore cash) as is legally possible. Please contact us at any time to discuss these exciting tax issues. We look forward to working with you.
