GOVERNMENT AFFAIRS UPDATE: SECTION 199A

A tremendous amount of time and effort was expended on behalf of cooperative owners leading up to the passage of the omnibus budget, which was signed into law by the President on March 23. Section 199 was a significant benefit to Aurora Cooperative farmer-owners; a total of $40M of Section 199 deduction was passed through to farmer-owners in the years 2013-2017. We are constantly working, on your behalf, to create every possible opportunity for you to be successful. That can mean commenting on trade, tax laws as they pertain to your cooperative, or engaging in discussions on the upcoming Farm Bill. Stay tuned to future updates regarding those topics as well as the promotion of ethanol.

The following summary is written by Jay Rempe, Senior Economist at Nebraska Farm Bureau

Section 199A Deduction as Revised in the Omnibus Budget Bill

The omnibus budget passed by Congress in March contained a “fix” for Section 199A in the federal tax code. The original provision in the Tax Cuts and Jobs Act passed in December came under scrutiny for how it treated commodity sales to cooperatives verses private grain companies. The fix seeks to remedy this and will affect the federal income tax filings for farmers and ranchers. The fix repeals the language which allows producers to deduct 20 percent of gross sales to cooperatives. It also reinstates the Domestic Production Activities Deduction for cooperatives.

The information below summarizes the deduction under Section 199A as passed in the omnibus budget package. The deduction allowed under the revised Section 199A for producers applies to both income generated from sales to cooperatives and sales to private companies. The revised section is neither simple nor straightforward and will affect each farm and ranch taxpayer differently. As always, consult with a tax preparer or accountant before making any dramatic changes to marketing plans or operations.

• The Section 199A deduction applies to any taxpayer who reports income from passthrough entities such as sole proprietorships, subchapter S corporations, or partnerships. The deduction does not apply to corporate income. Owners of non-farm businesses would also qualify for the deduction.
• The deduction is effective beginning January 1, 2018.
• Producers which receive income from pass-through businesses can take a business deduction equal to the lessor of 20 percent of their pass-through net income or 20 percent of taxable income minus capital gains.
• Producers who are members of a cooperative can take a deduction equal to any deduction received from a cooperative, plus 20 percent of net farm income, minus the lesser of 9 percent of net farm income or 50 percent of wages paid.
• Producers with taxable income above $157,000 per individual or $315,000 on a joint return may be restricted in the amount of deduction they can take. Producers over these thresholds may continue to retain the deduction of 50 percent of wages paid or 25 percent of wages plus 2.5 percent of qualified property is higher.
• Cooperatives can take a deduction of the lessor of 9 percent of adjusted gross income or 50 percent of W-2 wages. o Cooperatives have the option of retaining the deduction or passing some of the deduction to their patrons. o Farmers who sell to a cooperative will not know the full value of their deduction until the cooperative decides what share of the cooperative’s deduction will be retained or passed back to patrons.
• Taxpayers who sell to both cooperatives and private companies will need to apportion net farm income between the two sources.