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Co-op Tax Benefit to be Fixed This Month, Lawmaker Says

Retroactive Fix for 199A Provision Likely Attached to Omnibus Bill

A fix for a provision in the recently passed tax bill that gives farmers an incentive to sell grain to cooperatives instead of non-cooperative elevators or ethanol production facilities is being worked on and likely will likely be part of an omnibus bill set to be passed on March 23. 

Provision 199A, which was part of the tax bill implemented in December, was added to offset the loss of the prior 199 rider that was eliminated by the new law. The problem arose when it was discovered that the new provision, in general, allows member farmers to take a deduction equal to 20% of gross sales, limited to 100% of their taxable income overall, when selling to their cooperative.

Those who aren’t members or sell to an ethanol facility or non-cooperative can generally only take a deduction equal to 20% of their qualified business income, which is grain sales income minus expenses, said Kristine Tidgren, the director of the Center for Agricultural Law and Taxation and an adjunct assistant professor of agriculture education at Iowa State University.

While that’s still a decent deduction, the 199A provision puts non-cooperative grain purchasers at a competitive disadvantage, a problem that needs to be mended, lawmakers said. 

“The fix is still in the works,” said Rep. David Young, a Republican who represents Iowa’s Third District. “We should’ve done it in the last bipartisan budget plan that we did four weeks ago. My gut tells me this is going to be done before March 23 in this next omnibus appropriations bill.”

An omnibus bill is a tool used by lawmakers to package several measures – often subjects unrelated to each other – into one single vote. The fix for the 199A code likely will be retroactive, so growers who decide to sell to a cooperative to get the tax break may be jumping the gun. 

Tidgren told Successful Farming that the results of the provision ended up being a consequence that was unforeseen when it was passed in the tax bill.

“What’s come out in public statements from senators and from the USDA, it was unintended – the vast discrepancy in treatment,” she said.

Even if 199A was left in place, it’s unlikely cooperatives would have the capacity to handle the grain farmers would want to sell them during harvest, said Keri Jacobs, a professor in the economics department at Iowa State. 

In Iowa, 72% of the 1.4 billion bushels of licensed grain storage capacity is held by cooperatives, she said in a study published shortly after the provision was found to be problematic. That means the argument could be made that the law, if unchanged, wouldn’t create a significant grain-movement challenge in parts of Iowa. The percentage is similar in Kansas.

“Cooperatives in both states use ground piles to manage harvest gluts, and if this law sticks, that challenge may be exacerbated in the short term,” Jacobs said. “But cooperatives and producers would respond to the economic incentives to invest in grain storage in that case. Condominium grain storage is another option for producers to mitigate storage constraints.”

The National Council of Farmer Cooperatives said in a statement that it’s working with stakeholders including cooperatives, non-cooperative owned business, and lawmakers to find an “equitable” solution that benefits co-ops and farmer patrons while addressing the unforeseen consequences on producers’ marketing decisions. 

While it’s possible that cooperatives would be able to store all the grain, leaving any more than necessary outside on the ground isn’t an ideal scenario, Young said. 

“You see lots of piles of grain out there still and I don’t think the co-op system, as great as it is, I don’t think they’d have the capacity and ability to handle all of this activity,” he said. 

Young said he’s spoken to members of the community and industry leaders representing cooperatives, larger private entities, and commodity groups. Most believe fixing 199A as soon as possible “is an urgent matter, and I see it as an urgent matter,” he said. 

It’s unlikely to be controversial as the fix has bipartisan support from lawmakers on both sides of the aisle. At this point, it’s a matter of finding the proper channel to administer the solution, and lawmakers have already been seeking a fix and will release information as soon as it’s available, Young said.

“We’re putting it together right now,” he said. “We’re talking to appropriators and getting requests from members. I haven’t seen the actual language on the 199A fix, but the ways and means (committee) members say they’re working on that language. It doesn’t seem like it’ll be that complicated.”

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