Section 199A Retrospect: Impact on Cooperatives and Producers – Cristina Bucksbaum, Tax Manager
It has been a memorable and reflective year for the agricultural industry in general, and in particular for cooperatives with the passage of the Tax Cuts and Jobs Act – 2017 and the subsequent Consolidated Appropriations Act – 2018, Section 199A. Many concerns were raised within the agricultural community of the unintended consequences that the new law created under Section 199A. Perhaps chief among them were the provisions that farmers selling to cooperatives were the beneficiaries of significant tax advantages over farmers in similar circumstances selling to non-cooperatives. (The original Section 199A(a)(2) of the Tax Cuts and Jobs Act provided for a 20% gross deduction for “qualified cooperative dividends.” defined in the Act as including per-unit retain allocations paid in money.)
By late spring, congress got rid of Section 199A(a)(2) and ushered in new measures under the Consolidated Appropriations Act -2018, Section 199A. The Act provides the following measures.
+ Revises the farmer’s deduction to 20% of taxable income or qualified business income with some limits for farmers with high taxable incomes or capital gains.
+ Restores Section 199 tax deduction for specified agricultural and horticultural cooperatives under Section 199A(g).
+ Allows eligible patrons to claim a Section 199 deduction passed through from a specified agricultural and horticultural cooperative. All non-corporate taxpayers, S corporations, and other agricultural and horticultural cooperatives will now be included as eligible patrons
Under the new rules of Section 199A
In accordance with this change, farmers entering into transactions with a cooperative* will have their 20% deduction reduced by the lesser of: (1) 9% of qualified business income allocable to qualified payments received from cooperatives; or (2) 50% of wages allocable to such qualified payments. *See newsletter article on transition rules affecting patrons who have conducted business with fiscal year-end coops during the 2018 tax year.
This reduction does not impact the amount of Section 199 deduction passed through by the cooperative. This treatment attempts to duplicate circumstances for dealing with cooperatives under prior-law section 199. Consequently, the cooperative member’s total deduction will be the Section 199 pass-through deduction plus the modified 20% deduction for the year.
C corporations will not be eligible, under these new rules, for the Section 199 pass-through deduction from specified agricultural and horticultural cooperatives.
With the insertion of Section 199A(g) it’s business-as-usual for cooperatives. The computation of the Section 199 deduction remains unchanged, and cooperatives will retain the option of utilizing the deduction at the entity level or passing it through to their patrons (as reported on the 1099-PATR).
It is safe to say that cooperatives will face many decisional challenges as they come to terms with the broad impact of the new law. They will need to address striking a delicate balance between the overall tax needs of their patrons and their own operational needs. More clearly, they will need to demonstrate why doing business with a cooperative is advantageous over doing business with their non-cooperative competitors.