Protecting tax relief for farmers

Update on Section 199A and the Tax Cut and Jobs Act of 2017

Land O

Last fall, President Trump, Senate Majority Leader McConnell and House Speaker Paul Ryan released a framework to overhaul our nation’s tax policy. The goals of this framework were to reduce the corporate tax rate, stimulate the economy, and streamline and simplify the nation’s tax code. To reduce the corporate tax rate, Republican leaders proposed eliminating a number of provisions benefiting certain industries. Despite the objections of cooperatives, the Domestic Production Activities Deduction (DPAD, also known as Section 199) was one of the provisions eliminated in the initial framework.

As Republican leaders moved the tax bill through Congress, Land O’Lakes worked with the National Council of Farmer Cooperatives (NCFC) and our partners across the industry to engage on your behalf. Through strong collaboration with congressional leaders and record advocacy on your part, we ended the year on an extremely high note -- the inclusion of a provision in the Tax Cut & Jobs Act passed in 2017 that allows farmers to deduct up to 20 percent of total sales made to cooperatives.

This new provision, known as Section 199A, was meant to offset impacts caused by the repeal of DPAD. For our members, this should be considered a tremendous accomplishment to which your contribution was critical. Land O’Lakes members and employees sent more than 750 emails to congressional offices on this subject, not counting the follow up and personal phone calls to members of Congress.

Preserving Fairness and Competition

Following the passage of the Tax Cuts & Jobs Act, leaders from Congress, The White House, USDA and industry realized that Section 199A provisions influenced market behaviors and caused inequity between farmer-owned cooperatives and businesses operating privately or as corporations. Because of this disruption, NCFC and the National Grain and Feed Association (NGFA) agreed to lead an effort to resolve the issue and redraft 199A.

After nearly three months of negotiations, lawmakers introduced a legislative proposal meant to address these unintended consequences. Led by Sen. John Thune (R-SD) and Sen. John Hoeven (R-ND), a joint force of industry stakeholders, lawmakers and tax experts have relentlessly worked to identify a “fix” to the law that will maintain tax relief for farmers as originally envisioned, while restoring to the greatest extent possible the competitive balance in the marketplace for cooperatives, as well as private and independent grain, feed and grain-processing businesses.

The proposal was formally supported by NCFC and NGFA; Land O’Lakes joined them in approval of the action. The solution ensures that competitive choices remain available to agricultural producers, allowing them to operate in an environment where the marketplace -- not the tax code -- determines with whom they do business. We believe Land O’Lakes member-owners can thrive under these circumstances.

The proposal was included this week in a broader spending bill, called the Fiscal Year 2018 Omnibus Appropriations bill, which cleared Congress Friday morning. The bill was signed into law by President Trump on Friday afternoon.

As summarized by NCFC, the new provisions will:

  • Restore prior-law Section 199 treatment and allow patrons to claim a deduction passed through from a cooperative.

  • Change the farmer-level deduction to 20% of taxable income or qualified business income (in line with all other non-corporate taxpayers), with limitations for farmers with high taxable incomes or capital gains.

  • Farmers who transact with a cooperative will also be subject to the following:

    • The 20 percent deduction will be reduced by the lesser of (1) 9 percent of qualified business income allocable to such sales, or (2) 50 percent of wages allocable to such sales.

    • This reduction applies regardless of the amount of Section 199A deduction passed through by the cooperative and is intended to replicate the deduction the farmer had foregone by dealing with the cooperative under prior-law section 199.

    • The co-op member’s total deduction for the year will be the pass-through deduction plus the modified 20 percent deduction.

  • C corporations are not eligible for the 199A deduction. Should the bill be enacted in its current form, NCFC will be circulating a checklist for producers considering ownership restructuring in light of this restriction.

The full text of the bill is available here (see page 2033 for relevant provisions). The changes to Section 199A will be retroactive to the start of the 2018 tax year on Jan. 1.

Advocating for Our Industry

Thank you again for your support and advocacy on this issue. Your continued engagement truly is a testament to the strength of our cooperative system and the grassroots advocacy muscle we’ve developed in Washington, D.C., and across the country. If you have any questions, or want to learn more about how you can continue to engage in 2018, please contact Autumn Price.

Important Tax Advisory

Section 199A includes many complexities, some of which will limit the value of the new tax deduction for some farmers (generally those with higher incomes or with farm wages). We suggest that you consult with your legal and tax advisors concerning how to the law is best managed in your operation.