Recent Bill Provides Clarification
On Friday, March 23, 2018, President Trump signed a government spending bill, avoiding a government shutdown. Included in that bill was a very important change to the new Section 199A deduction available to patrons of agricultural and horticultural cooperatives that creates a two-pronged potential deduction.
Cooperative Pass-Through Deduction
Similar to the old Section 199 deduction, the first prong of the deduction can be passed through from the cooperative to its patrons and/or taken at the cooperative level. At the cooperative level, the deduction is limited to the lesser of 9% of the cooperative’s taxable income or 50% of wages paid by the cooperative. If the deduction is passed through to the patrons, the only limitations on taking the deduction are the taxable income of the taxpayer’s qualified farm business and that the deduction cannot be claimed by a C corporation.
The second potential deduction allowed for patrons other than C corporations is equal to 20% of net farm income minus capital gains minus the lesser of 9% of net farm income or 50% of wages paid. It will guarantee that the taxpayer will get at least an 11% deduction on taxable income minus capital gains plus a potential Section 199-like deduction passed through from the cooperative (as detailed above).
These changes help preserve the tax advantage that was afforded agricultural and horticultural cooperatives and their patrons in previous tax laws. In addition, the new law gives them a similar deduction to the new 20% deduction allowed against qualified business income (QBI), implemented by Section 199A, that is available to taxpayers engaged in any trade or business that is not organized as a C corporation.
The application of the new law gets a bit more complicated when a farm business sells its production inventory to a cooperative and a private company. In this case, the business will need to bifurcate income and apply the cooperative deduction discussed in this article and the QBI deduction in Section 199A to these separate activities within the farm business.
There are more potential changes on the horizon as Republicans work to propose further tax cuts. If you have questions about this new law or any of the new laws that were passed in the Tax Cuts and Jobs Act, please contact us.