Two trade groups representing farmer cooperatives and grain and feed producers have reached an agreement to resolve a technical problem in the Tax Cuts and Jobs Act, with the support of Republican leaders in Congress who hope to include the provision within a larger appropriations bill.
Section 199A of the tax law that Congress passed last December gave an advantage to farm cooperatives over corporate-owned feed producers such as Archer Daniels Midland, allowing farmers who sell their crops to agricultural co-ops to take advantage of the deduction for pass-through businesses so they can deduct 20 percent of their gross sales. However, if the farmers sell to a corporate-owned buyer, they can only deduct 20 percent of their net income, incentivizing them to bypass the corporations in favor of the co-ops. ADM and other corporate agribusinesses have lobbied for the so-called “grain glitch” to be fixed.
The National Council of Farmer Cooperatives and National Grain and Feed Association issued a joint statement Tuesday saying they support inclusion of legislation to amend Section 199A as part of Congress’s fiscal year 2018 omnibus appropriations bill this month, and believe it warrants bipartisan support. The legislation, if approved by Congress, would be retroactive to the start of the 2018 tax year on Jan. 1.
However, so far, Democrats haven’t yet signed onto the deal and have indicated they want to press for more extensive changes in the tax law, which they were effectively shut out from writing last December. A technical corrections bill would require bipartisan support, as would the omnibus appropriations bill. Unlike the tax law, which Republicans were able to push through Congress with a simple 51-vote majority in the Senate by using a budget reconciliation strategy, a technical corrections bill or appropriations bill would require at least 60 votes to overcome a possible Senate filibuster.
The deal reached by the two agricultural groups would aim to replicate the tax benefits accorded to farmer-owned cooperatives and the farms that patronize them under the previous Section 199, also known as the Domestic Production Activities Deduction, of the tax code, as it existed prior to its repeal under the new tax law. That way, the tax code wouldn’t provide an incentive for farmers to do business with a company purely because it is organized as a cooperative or private company.
“Throughout the tax reform process that began last year, NCFC has consistently called on Congress to retain DPAD for farmer co-ops and their member-owners, and this legislation largely meets that goal,” said National Council of Farmer Cooperatives president and CEO Chuck Conner in a statement. “The old Section 199 had a proven track record of letting farmers keep more of their hard-earned money. We expect these provisions to do the same. By combining the individual-level business deductions that farmers can claim and the pass-through from their co-ops, farmers selling to cooperatives have the opportunity to see benefits in excess of the 20 percent 199A pass-through deduction.”
National Grain and Feed Association president and CEO Randy Gordon said the two groups had worked carefully to provide tax relief to farmers while restoring competitive balance in the marketplace. “Given the complexities of the issue and the different types and sizes of businesses, no legislation will ever be perfect for every income or business situation,” he said in a statement. “But the stakeholder concepts on which this legislative language is based have been analyzed and reanalyzed in excruciating detail by tax experts representing both cooperative and private/independent businesses, as well as Congressional tax staff experts. We believe the solution merits enactment so that competitive choices remain available to agricultural producers and the marketplace—not the tax code—determines with whom they do business. We appreciate the commitment of members of Congress, Republicans and Democrats alike, to get it fixed.”
A group of Republican senators from largely rural states quickly issued a joint statement of support Tuesday evening, including Senate Finance Committee Chairman Orrin Hatch, R-Utah, and Senators Chuck Grassley, R-Iowa, Pat Roberts, R-Kan., John Thune, R-S.D., and John Hoeven, R-N.D., although the reaction from Democrats was more muted. “The new, pro-growth tax law was designed to lift hard-working, middle-class families—whether they are farmers, ranchers or entrepreneurs—and the economy as a whole,” they said. “After discovering an unintended consequence that created an inequity within the agricultural business community, we’ve worked extensively with stakeholders, our colleagues and the administration to develop a solution that will level the playing field and ensure the nation’s cooperatives, independent small businesses and publicly traded firms can fairly benefit from pro-growth tax reform. The stakeholder-driven agreement announced today achieves this goal and restores balanced competition within the marketplace. We’re committed to working with our colleagues to act swiftly on the measure and get it signed into law as soon as possible.”
Democrats haven’t yet committed to fixing the “grain glitch” and may use the leverage to negotiate changing other parts of the tax law. Jared Bernstein, a former chief economist to Vice President Joe Biden and a senior fellow at the Center on Budget and Policy Priorities, recommended in a Washington Post editorial that they use the leverage to push for a significant expansion in the Earned Income Tax Credit and to “fix the Child Tax Credit” by making it fully refundable for low-income working parents. He also suggested the issue could be used to push for permanent status for so-called “Dreamers” who benefited from President Obama’s Deferred Action for Childhood Arrivals, or DACA, program that the Trump administration has threatened to end.
Fixing the “grain glitch” could have the effect of closing a possible loophole in the new tax law under which other types of pass-through businesses, such as accounting firms, law firms, medical practices and investment firms could theoretically reorganize themselves as co-ops to be able to claim the 20 percent deduction for any level of income (see Rich professionals can exploit tax break for farms, small firms). The deduction starts to phase out for certain types of professional services firms when the net income of one of the owners reaches $157,500, or $315,000 for joint filers, and it ends entirely once income reaches $207,500, or $415,000 for joint filers. By reorganizing themselves as cooperatives, partners and firms with income above those levels would be able to claim the full 20 percent deduction.
The rules surrounding the pass-through deduction remain unclear, however, and many tax professionals and taxpayers are awaiting guidance that the Internal Revenue Service and the Treasury Department have promised to provide by June.