The Tax Cuts and Jobs Act that passed at the end of 2017 included a new deduction for both cooperatives and their members under section 199A. The original language gave cooperatives the ability to deduct 20% of gross income (less cooperative dividends) and individuals were entitled to a very favorable deduction in the amount of 20% of gross sales to a cooperative.
This original language generated significant controversy after it was passed as it gave individuals a clear incentive to sell product to cooperatives (versus non-cooperatives) due to a more favorable tax deduction. Not surprisingly, many grain elevators and other non-cooperative entities were opposed to the bill and took swift action to voice their opposition, with some even considering converting to a cooperative themselves. It was clear that this co-op advantage was not the intent of Congress when drafting the legislation due to the unfair advantage it created for cooperatives. This drafting error was shortly thereafter referred to as the “grain glitch.”
In the wake of this controversy, lobbyists and industry groups such as NCFC (National Council of Farmer Cooperatives) and NGFA (National Grain and Feed Association) worked together to help provide a solution to this issue. Their goal was to provide a bipartisan legislative solution that would restore the competitive landscape as it existed before the “grain glitch” was passed. After several months of collaboration, the two groups issued a joint statement on March 13, 2018 supporting enactment of legislation they had helped draft. The legislation was primarily intended to replicate the tax benefits received by cooperatives and their members under the previous section 199 (Domestic Production Activities Deduction).
The legislation containing the grain glitch “fix” was introduced as part of the omnibus spending bill (Consolidated Appropriations Act, 2018) and was passed into law on March 23, 2018.
The deduction for cooperative members included several key changes as a result of this legislation. From a cooperative standpoint, however, the “new” section 199A deduction is similar to the previous section 199 (DPAD) deduction. This deduction is calculated as 9% of the lesser of qualified production activities income (QPAI) or taxable income for the taxable year. This deduction is once again limited by 50% of wages allocable to domestic production gross receipts (DPGR), which is the same wage limitation that existed with DPAD. QPAI and DPGR are defined the same way they were under old section 199. Cooperatives also retain the ability to pass through all or a portion of its section 199A deduction. Thus, it is evident that there is very little net change at the cooperative level.
Cooperatives continue to face a wide range of unique tax and accounting issues. For assistance with these issues, section 199A or tax reform in general, contact a member of the Baker Tilly cooperative team.
For more information on this topic, or to learn how Baker Tilly specialists can help, contact our team.
The information provided here is of a general nature and is not intended to address the specific circumstances of any individual or entity. In specific circumstances, the services of a professional should be sought. Tax information, if any, contained in this communication was not intended or written to be used by any person for the purpose of avoiding penalties, nor should such information be construed as an opinion upon which any person may rely. The intended recipients of this communication and any attachments are not subject to any limitation on the disclosure of the tax treatment or tax structure of any transaction or matter that is the subject of this communication and any attachments.