Carve-Out for Farm Co-ops in Tax Reform Measure

The Wall Street Journal editorial board indicated late last month that, “One risk for the political success of the GOP tax reform is that some businesses will manipulate a large new deduction that could reduce federal revenue and discredit the project. An early warning is a carve-out that benefits some farmers, a clunker that ought to be corrected.

The new tax law allows a larger deduction for farmers selling to farm cooperatives versus other operators. The practical effect is a tax advantage for selling to cooperatives, which has no economic rationale. Some farmers could use the loophole to zero out their taxable income.

“The tax bill is a plus for simplification overall, both on the individual and corporate side. But the farm co-op loophole exploits an exception that created a large deduction for businesses organized as ‘pass-throughs.’ The new section allows filers to deduct 20% of qualified business income. But some filers can deduct 20% of qualified co-op dividends, which is broader. The ostensible point was to preserve preferences for co-ops in the old code.”

The Journal noted that, “The co-op provision’s authors, Senators John Hoeven and John Thune of North and South Dakota, respectively, have said the dispensation should be fixed, though the question is how. Scott Greenberg of the Tax Foundation laid out some possible fixes, and the best route would be to dump the separate co-op deduction altogether.”

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