The new section 199A, which takes effect January 1, 2018, will continue to be defined in the months ahead but in hopes of offering initial clarity to the new tax reform, we have been provided the below update courtesy of our tax partner, Gardiner Thomsen.
A farmer patron selling product to their agricultural cooperative, please note the following:
A farmer/patron who sells their products to an agricultural cooperative of which they are a member receives a deduction calculated as follows – total payments received from the cooperative (including PURPIM’s, qualified patronage, written notices of allocation) times 20%. This deduction is based on gross cooperative payments received. This deduction is limited – to 100% of taxable income (not farm income) less capital gains. It would seem that this limitation is in effect to prevent this deduction from reducing taxable income to a negative amount or to offset tax associated with capital gains.
Please note that this analysis is based on the best available information as of January 5, 2018, and that the IRS has at this time not issued any regulations or any other guidance or clarification. The IRS likely will issue guidance in the future which may change our assessment of Section 199A.
November 30, 2017
While Congress is still working through the details of the proposed new tax reform, Key Cooperative is aware the Section 199 Domestic Production Activities Deduction is in jeopardy of being eliminated. This will have a net negative impact on a majority of cooperative members.
The House-passed tax reform bill eliminates Section 199 entirely, and the Senate-proposed bill would do the same. Senator John Hoeven (R-ND) has agreed to offer an amendment that would preserve this measure for agricultural cooperatives.
Since its introduction in 2004, Section 199, has been a vital pass-through for cooperative member-owners and the entire agricultural community. Nationwide, the deduction returns an estimated $2 billion each year to farmers and their rural communities. (Source: Land O’Lakes, Inc.)