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How tax reform and QBID are affecting the agriculture industry

February 12, 2018

By Doug Funke, CPA
Partner

The 20% qualified business income deduction (QBID) for qualified cooperative dividends under the Tax Cuts and Jobs Act (TCJA) is creating a lot of questions and buzz in the agriculture industry for its impact on cooperatives and private businesses. Here is a synopsis of what the law states as well as the potential impact to those in the agriculture industry.

Background:

The Act provides an increased tax benefit to farmers selling commodities to cooperatives. The tax benefit to farmers provides cooperatives a competitive advantage over similar privately-held or investor-owned companies, such as grain dealers. The senators who helped write the cooperative provisions of the Act are now trying to revise the legislation to address complaints that it unfairly favors cooperatives and their members

Summary:

  • QBID is effective beginning with the 2018 tax year
  • Qualified cooperative dividends are reported on Form 1099-PATR and include patronage dividends, per-unit retain allocations, qualified written notices of allocations or similar amounts
  • Cooperatives treat commodity purchases from farmers as cash payment of per-unit-retain allocations paid in cash
    • For a farmer this treatment recharacterizes income from commodity sales to cooperative dividends for Schedule F reporting
    • The character of payments is developed from numerous private letter rulings issued for purposes of calculating the Section 199 Domestic Production Activities Deduction (DPAD) for cooperatives
    • Cooperative treatment of purchases from farmers as per-unit-retain allocations is the same for purposes of calculating Section 199A QBID
  • Qualified cooperative dividends are excluded from farm income to determine qualified business income
  • The 20% of qualified cooperative dividends amount included in total QBID is not subject to the wage limits that apply to qualified business income

Observations:

  • Everything else being equal, there is a significant tax advantage for the farmer to sell to a cooperative
  • A farmer will need to compare the tax savings to differences in market prices or higher shipping costs to determine if selling to a cooperative is more profitable
  • Privately-owned companies dealing in agricultural commodities could experience a dramatic decline in sales

Changes are expected:

The 20% deduction was designed to mimic what cooperatives got under Section 199 for DPAD, but it unintentionally went farther than expected. The legislative fix is anticipated to scale back the benefit to cooperative members, but plans for how that will be accomplished are not yet available. New provisions could be included in the omnibus spending bill that lawmakers hope to pass soon.

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