By Doug Funke, CPA
Partner
When the Tax Cuts and Jobs Act was signed into law late 2017, it provided an increased tax benefit to farmers selling commodities to cooperatives over privately-held or investor-owned companies.
The anticipated fix to this “grain glitch” was included as a technical correction in the omnibus spending bill signed by President Trump on March 23, 2018. As expected, the bill amends provisions of the 2017 tax act that provided a significant incentive for farmers to sell products to agricultural cooperatives.
Agricultural cooperatives lost the 20 percent qualified business income deduction (QBID) which was replaced by the domestic production activities deduction (DPAD) in effect prior to passage of the 2017 tax act. In general, agricultural cooperatives will receive a deduction for 9 percent of qualifying income which they can either use to offset their taxable income or pass through to their farmer members.
Farmers lost the provision of the 2017 tax that effectively excluded the deduction for qualified cooperative distributions from limitations based on wages paid. They gained DPAD passed through from cooperatives and an increase in business income eligible for QBID. The bill changed the calculation of QBID to exclude 9 percent of income received from cooperatives that was used to calculate DPAD. Farmers will include the remaining distributions in their calculation of QBID which is generally limited to 50 percent of wages paid by the farmer.
These changes are effective retroactively to Jan. 1, 2018.
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