The Tax Cuts and Job Acts (TCJA) signed into law on Dec. 22, 2017, created a new benefit for cooperatives and their patrons. The new deduction under section 199A may benefit both cooperatives and their patrons.
The new legislation allows a 20 percent deduction for certain agricultural or horticultural cooperatives engaged in manufacturing, production, growth or extraction of an agricultural or horticultural product, the marketing of such product, or the provision of supplies, equipment or services to farmers who produce or market agricultural products. The deduction is the lesser of:
- taxable income of the cooperative,
- 20 percent of the cooperative’s gross income over qualified cooperative dividends (which includes patronage dividends, per-unit retain allocations and qualified written notices of allocations), or
- the greater of:
- 50 percent of the cooperative’s W-2 wages, or
- the sum of 25% of the cooperative’s W-2 wages plus 2.5 percent of the unadjusted basis immediately after acquisition of qualified property of the cooperative
In addition to the deduction under section 199A at the cooperative level, noncorporate patrons who receive payments from a cooperative are eligible for the 20 percent deduction for qualified business income and qualified cooperative dividends. This deduction is calculated as the sum of:
- the lesser of:
- the combined qualified business income of the taxpayer, or
- 20 percent of the excess of taxable income over the sum of any net capital gain and qualified cooperative dividends
- plus the lesser of:
- 20 percent of qualified cooperative dividends (which includes patronage dividends, per-unit retain allocations and qualified written notices of allocations), or
- taxable income reduced by net capital gain
Many cooperatives previously passed out the domestic production activities deduction to their patrons on Form 1099-PATR. The new deduction under section 199A available to patrons will not be calculated at the cooperative level, but rather at the patron level. We would be happy to discuss with you how best to communicate the new deduction to your patrons. The new legislation has already received the attention of industries associated with and competing with cooperatives. Baker Tilly will continue to monitor and provide updates on this topic.
For more information on this topic, or to learn how Baker Tilly specialists can help, contact our team.