Big Ag Companies Avoid Move to Co-op Status
Agricultural marketing cooperatives have been operating in the U.S. for over 100 years. Laws governing their operations haven’t changed significantly in a long time, so we don’t talk about them very much. However, a few months ago the intersection of tax law and cooperatives suddenly hit center stage. Why? The 2018 tax bill gave farmers a new tax deduction for selling products to a cooperative – a deduction that was larger than the deduction for sales to private grain buyers, like Cargill or ADM. A lot of news outlets have been calling it the “grain glitch.”
You’ve probably heard about the new 20% pass-through deduction. In essence, in 2018 and beyond you’ll have to pay tax on only 80% of your “qualified business income (QBI)” from a partnership, S corporation, or LLC, defined as the net income of your business. This deduction is allowable for the vast majority of small businesses, including farms. (However, there are some complex income limitations for service businesses.)
Here’s how the co-op status came into play. Under the new law, a farmer could deduct 20% of gross income from sales to co-ops, rather than 20% of net income from sales to anybody else. Many people think that the law’s language about co-op sales was merely a mistake, an oversight. Maybe it was. John Hoeven and John Thune, the two senators who drafted the provision, have said that the outcome for co-ops was unintentional.
Don’t run off immediately and sell your grain to a marketing cooperative to get that 20% gross deduction. The House passed a glitch fix yesterday, and the Senate passed one today. That fix is retroactive to the beginning of 2018, but exact implementation is still in the works. In my opinion, it would be unfair to not allow the law, as it was written, to apply to co-op sales between January 1, 2018, and the date that the fix was signed into law by the president. Of course, doing that would increase the complexity of tax reporting for co-op accountants and farm tax return preparers across the land for 2018. Grain sales to co-ops in the first few months of the year would get a larger deduction than sales to co-ops for the rest of the year. Regardless of the complexity, retroactive changes to the tax code always seem wrong to me.
The big for-profit grain buyers have been working hard to change this new competitive disadvantage. According to The Kiplinger Tax Letter, “GOP tax writers, who have gotten lots of flak from agricultural companies, lobbyists, and members of their own party, vowed to correct this glitch sooner rather than later.” Also, I heard recently from an ag industry executive that the big agricultural corporations were confident that the law would be changed.
Marketing cooperatives were established by farmers in the first place to undertake transportation, packaging, distribution, and, of course, the marketing of farm products. This was done primarily in order to allow groups of farmers to compete with the big ag product corporations. If the new law would have held for some reason, the competitive landscape would have been turned upside down. The big ag corporations would have been scrambling to somehow establish or partner with cooperatives, thereby making everyone a cooperative.
Many people don’t know that a co-op can be exempt or nonexempt, depending on its rules of operation. Nonexempt cooperatives are under fewer limitations about stock ownership, dividend rates, membership, and business transactions with nonmembers. Nonexempt status provides greater flexibility that can accommodate things like joint-venture agreements. So, the big ag companies could have found a way to get into the co-op game if they really had to, but they don’t have to go there now.