TO: NCFC Council, Legal, Tax & Accounting Committee & Government Affairs Committee

FROM: NCFC Staff

DATE: 03/13/18

In a joint press release issued today (copied below), NCFC and the National Grain and Feed Association have said they support inclusion of the legislation to amend Section 199A as part of the fiscal year 2018 Omnibus appropriations bill this month.

Statutory language has not yet been introduced; however, we believe the proposal accomplishes the goal NCFC set out at the start of the tax reform process last summer— to retain the prior law section 199 deduction for co-ops in the structure of the new tax code. 

Under the draft, the following changes will be effective retroactive to January 1, 2018.

• Repeals the 20% of gross income deduction for farmer-patrons.
• Restores prior-law section 199 concepts and allows patrons to claim a deduction passed through from a cooperative. The deduction passed-through by the cooperative is not limited by capital gains.
• Changes the farmer-level deduction to 20% of qualified business income (in line with all other non-corporate taxpayers), with limitations for farmers with high taxable incomes or capital gains (also, as applicable to all other non-corporate taxpayers). 
  • Farmers who conduct business with a co-op would reduce their 20% deduction by the lesser of (1) 9% of qualified business income allocable to such sales or (2) 50% of wages allocable to such sales. 
  • This reduction is intended to replicate the deduction the farmer had foregone by dealing with the cooperative under prior-law section 199. 
  • A co-op farmer-member’s total deduction for the year would thus be the pass-through deduction plus the modified 20% deduction.
• Farms structured as C corporations are not eligible for the 20% deduction at the farmer level and are not eligible for the co-op pass-through.  
• A producer who sells to both cooperatives and private industry would allocate income and wages between the two types of entities.
• Subject to the final language included in the technical description of the bill, supply activity will be treated as under prior law; e.g., supplies such as fertilizer, diesel fuel, and other tangible personal property consumed or used in connection with the marketing of any other agricultural or horticultural product will be eligible for the deduction.

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NCFC/NGFA Joint Statement on Legislation to Resolve Section 199A of the Tax Cuts and Jobs Act

WASHINGTON, DC and ARLINGTON, VA (March 13, 2018) – The National Council of Farmer Cooperatives (NCFC) and National Grain and Feed Association (NGFA) today issued a joint statement regarding a stakeholder-driven proposal to resolve the unintended consequences of Section 199A of the Tax Cuts and Jobs Act. 

The two organizations said they support inclusion of the legislation to amend Section 199A as part of the 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.

NCFC and NGFA expressed appreciation to House Ways and Means Committee Chairman Kevin Brady, R-Texas, Senate Finance Committee Chairman Orrin Hatch, R-Utah, and the Congressional Joint Committee on Taxation for developing legislative language over the last week that is designed to achieve the two fundamental objectives of stakeholders:

• First, to replicate to the greatest extent possible the tax benefits accorded to farmer-owned cooperatives and their farmer-patrons under the previous Section 199, also known as the Domestic Production Activities Deduction (DPAD), of the tax code, as it existed prior to its repeal in the Tax Cuts and Jobs Act enacted on Dec. 23, 2017; and 
• Second, to restore the competitive landscape of the marketplace as it existed in December 2017 so that the tax code does not provide an incentive for farmers to do business with a company purely because it is organized as a cooperative or private/independent firm.  

“Throughout the tax reform process that began last year, NCFC has consistently called on Congress to retain DPAD for famer co-ops and their member-owners and this legislation largely meets that goal. 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,” said Chuck Conner, president and CEO of NCFC. “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.”

“We would also like to recognize the tireless efforts of Sens. John Thune of South Dakota and John Hoeven of North Dakota to ensure fair treatment for farmer co-ops and their member-owners,” Conner continued. “They have brought together both sides and fostered an atmosphere that has made today’s proposal possible.”

NGFA President and CEO Randy Gordon said great care was taken by stakeholders to develop a concept that provides tax relief to farmers, as envisioned in the tax-reform law, while restoring to the maximum extent possible the competitive balance in the marketplace.  NGFA noted its members consist of an almost equal number of grain, feed and grain-processing businesses organized as cooperatives and private/independents.

“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,” Gordon said.  “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.”  

NGFA joined in thanking Sens. Thune and Hoeven, as well as Sens. Chuck Grassley, R-Iowa, and Pat Roberts, R-Kan., for working with stakeholders, as well as several Democratic senators who have expressed an interest in seeing the issue resolved. 

NCFC and NGFA said they will remain engaged on this critical issue until a stakeholder-led solution is enacted by Congress.