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Some Farmers Don’t Have a Tax Problem, Farm Manager Says

Why worry about a new co-op tax provision?

WEST DES MOINES, Iowa — A lot of farmers and grain buyers are buzzing about a new tax law that gives benefits for crop sold to co-ops. Should they be?

The Tax Cuts and Jobs Act of 2017, passed in December, included a provision that is universally interpreted to allow farmers who sell commodities to cooperatives to deduct up to 20% of the net proceeds of that sale.

The law does have limitating provisions, which depend on your tax filing status.

Bill Hanigan, a Davis Brown Law Firm lawyer, reminded attendees at today’s Land Investment Expo, intentional or not, this is now the law.

“It’s creating a significant uproar in the grain marketplace. If I’m a corn producer, for example, and I can sell to an elevator that is not a cooperative and not get this tax benefit, or I can sell to the cooperative elevator and get to deduct 20% of the sale, I know where I am going to drive my semi-load of grain,” Hanigan says. “And that is changing things.”

Food companies, commodities buyers such as Archer-Daniels Midland, and even WalMart claim to be the entities that will be hardest hit by the new tax allowance for farmers.

As a result, some of them have joined together to get the government to reverse the tax provision.   

Hanigan says the solution will require federal legislation on a tax bill. And that tax bill will require at least 60 votes in the U.S. Senate.

When this tax law was passed, it only needed 51 votes, because it was included in a reconciliation bill. Yet, there won’t be another reconciliation bill until next year.

“So, to fix this tax law in the Federal fiscal year ending September 30, 2018, 60 votes will be needed. There is agreement amongst the authors of the provision to fix it. Presently, there are not 60 votes,” Hanigan says.

A Farmer Tax Problem?

A farm manager representing a national bank in attendance, choosing anonymity, questions why farmers are so concerned about this tax issue with the co-ops when most don’t have a tax problem.

“A lot of the producers I work with are not as excited about this because there are a lot of unknowns. Yes, some will sell to a co-op, but others are saying, ‘I don’t have a tax liability, I’m in growth mode, and I’m going to sell where I can get the highest price and where it is convenient,’” the farm manager stated.

The farm manager added, “They (farmers) are not worrying about the new tax structure because they are growing and don’t have a tax liability.”

The farm manager says that farmers are jumping the gun in trying to change to different buyers, considering we’re not sure whether the tax provision will be reversed.

“My advice to my producer-customers is to do what is best for them. But, as a farm manager, as a fiduciary, we are not going to make assumptions. We’re waiting for guidance.”

The farm manager hasn’t made any changes for marketing old crop.

Hanigan says this provision will only reduce your taxable income to zero.

“So, if you are not expecting any taxable income in calendar 2018, then you don’t care,” Hanigan says.

Hanigan adds, “Most farmers start out the year hoping there will be income coming in, and if there is, I want to take this deduction. So, the anecdotal evidence is showing that you are already seeing farmers turning toward their cooperative.”

Hanigan disagrees with any notion that farmers won’t pay any attention to this new tax deduction.

“I think farmers are really smart about the taxes that affect them. As a consequence, if you are already guaranteed a loss for 2018, then why are you worried about switching to another buyer. Yet, everybody is optimistic in a change in grain prices, and suddenly you have a profit on your hands. And you don’t know if that is going to happen until you are in the combine.”

Hanigan admits that Congress could prioritize this issue and fix it next week or next month.

“If they do fix it, then you go back to your original marketing plan and sell to that original buyer that is an ethanol plant, elevator, or wherever you went before,” Hanigan says.

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