Source: POLITICO'S MORNING AGRICULTURE, 1/10/18

A provision in the new tax law gives growers a better deal at tax time if they sell their agricultural products to co-ops rather than other types of companies, The Wall Street Journal reported on Tuesday. The new deduction, inserted by Senate Ag member John Hoeven (R-N.D.) and other lawmakers after the tax bill was revamped shortly before passage, could have far-reaching consequences for the industry, especially in the grains sector.

How it works: Farmers are now permitted to deduct up to 20 percent of total sales made to co-ops. For some farmers, the result could be every taxpayer's wish: zero taxable income. If farmers sell to privately held or investor-owned companies, the deduction isn't quite so yuge - roughly 20 percent of income. The provision does have a time limit: It will expire at the end of 2025.

The Journal piece has a good summary of how this will play out once accountants get involved: "Consider a simplified example of a wheat farmer with $500,000 in annual grain sales and $80,000 in profit. A farmer selling grain to a cooperative could deduct 20% of sales, wiping out the entire income-tax liability. By contrast, if the farmer sells grain to an independent grain operator, the farmer's deduction would be limited to 20% of the profit, or $16,000, leaving that farmer with up to $64,000 in taxable income."

How the provision arose: As Pros may recall, the provision was inserted into the bill as House and Senate leaders negotiated in December, in a final frenzy to get the legislation to President Donald Trump's desk before Christmas. The revision of the bill did away with the Section 199 deduction on domestic U.S. production that was also available to manufacturers as well as farm co-ops. But Hoeven and others, including Senate Ag's John Thune (R-S.D.), succeeded in adding a new offset. 

Kami Capener, communications director for Hoeven, said the provision was not made to put private firms at a disadvantage. "We are looking into any unintentional impacts to non-cooperative elevators and will work with them to address it," Capener said.

Where farmers will go: The deduction has the potential to drive business away from firms that are not structured as co-ops. That means big buyers like Cargill could be hurt, but businesses like family-owned grain elevator operators would stand to lose, too.
As farmers (or farmers' tax advisers) learn of the measure, they will look to make the new law work for them by selling to cooperatives. "It gives a very real incentive, under the right circumstances, for farmers to sell to co-ops over independents," Todd Lafferty, co-chief executive of Wheeler Brothers Grain Co., a 100-year-old privately owned company operated out of Watonga, Okla., told The Journal. 

Tough luck for some, but a tougher fix: The potential hit to independent operators is an example of the type of unforeseen consequences that many tax experts worried about prior to the law's passage, because of the speed with which the GOP moved the bill and the limited time that members were given to dissect the text after the revision. 

An aide to Thune said the senator "is aware of the potential unintended effects" and is working with colleagues and those affected to find "a reasonable solution." But GOP lawmakers are going to have trouble making fixes, because any changes will likely need 60 votes in the Senate - and not a single Democrat supported the Republican-driven bill. 

Hoeven will also work to remedy the issue. "We're working on this adjustment, but there will undoubtedly be others," Capener said."That's why you usually have a technical corrections bill after a tax relief bill."

The National Council of Farmer Cooperatives, in a statement to POLITICO, noted that the elimination of the Section 199 deduction without an offset "would have resulted in a tax increase on farmers across the country." The group's president, Chuck Conner, added: "Policy makers ultimately decided that they preferred to replace it with a deduction that fit under the new structures they created in the tax bill."