An update last week by Kristine A. Tidgren, at the Iowa State University “Ag Docket” Blog, stated that, “President Trump signed the Consolidated Appropriations Act, 2018, H.R. 1625, on March 23, 2018. At the end of the 2,232-page legislation, Congress included a section written to ‘fix’ the ‘grain glitch.’ This is, of course, the provision in the Tax Cuts and Jobs Act that provided significantly higher tax deductions (in most cases) to patrons who sold commodities to cooperatives rather than to non-cooperatives. You can read more detail about the original provision here.
“The 17-page ‘fix,’ while attempting to level the playing field, adds even more complexity to an already convoluted section of the new tax law, IRC § 199A. The fix retroactively takes effect, beginning January 1, 2018. This wipes from existence the provision giving cooperative patrons a 20-percent deduction based upon gross sales.”
The ISU update explained that, “Under the fix, the tax benefit to farmers who sell grain, for example, to a non-cooperative does not change. They are generally entitled to the new 20 percent 199A deduction, calculated based upon their net income from the sale. Their overall 199A deduction is limited to 20 percent of taxable income (minus capital gains). It is also restricted by a wages/capital limitation if their income exceeds $157,000 for singles and $315,000 for those who are married filing jointly.
“The fix completely changes, however, the tax benefit offered to patrons who sell grain, for example, to their cooperative. Instead of the 20-percent deduction calculated based upon their gross sales, the cooperative patron is subject to a new bifurcated calculation and a hybrid 199A deduction. Essentially, the fix gives the cooperative patron a deduction that blends the new 199A deduction with the old 199 DPAD deduction (all within the new 199A).* Depending upon their individual situations, cooperative patrons may be advantaged, disadvantaged, or essentially treated the same by selling to a cooperative rather than selling to a non-cooperative. While the significant advantage is gone, the complexity certainly is not.”
Last week’s update added that, “First, patrons calculate the 20 percent 199A deduction that would apply if they had sold the commodity to a non-cooperative. But they don’t stop there. The patron must then subtract from that initial 199A deduction amount whichever of the following is smaller:
- 9 percent of net income attributable to cooperative sale(s) OR
- 50 percent of W-2 wages they paid to earn that income from the cooperative
“But we are still not done. Once that amount is backed out, patrons get to add an additional ‘DPAD-like’ deduction (if any) passed through to them by the cooperative. The determination of the amount of this new ‘DPAD-like’ deduction, which can range from 0 to 9 percent of the patron’s sales to the cooperative, is at the discretion of the cooperative, based upon a patron’s share of business. It is governed by language copied directly from the old DPAD provision. In any event, the overall amount a cooperative can choose to pass through to its members cannot exceed 50 percent of the value of the wages the cooperative pays to its employees.The farmer’s deduction cannot exceed taxable income (subtracting the 20 percent QBI deduction detailed above, but not subtracting capital gain).”
* “It should be remembered that the 199A deduction only applies to pass-throughs and sole proprietors. Talk of a ‘DPAD-like’ deduction does not mean that corporations are now eligible for this deduction.”
The complete ISU “Ag Docket” update is available here.
