Members of farm cooperatives have dodged a bullet in the newly passed federal tax reform bill.
As originally proposed, the legislation would have eliminated a tax deduction and increased co-ops’ tax obligations by 6-15 percent, according to the National Council of Farmer Cooperatives. But the final bill offsets that increase with other savings.
The deduction, known as Section 199, allows farm cooperatives to deduct 9 percent of their profits from their taxable gross income. Most of that deduction has traditionally been passed on to farmer members, who can then apply it to their own income, said Justin Darisse, vice president of communications for NCFC.
So, for example, a food processor cooperative with $1 million in profits could deduct $90,000 from its taxable income. Cooperatives would usually have made most of that $90,000 available to members proportionally based on how much they used the cooperative.
When the original tax reform proposal was unveiled, NCFC and other groups protested the repeal of Section 199, which they estimated saved U.S. farmers about $2 billion annually.
While the version of the bill approved by Congress still repeals that provision, it’s replaced with two new tax deductions.
Under one provision, farmers can deduct 20 percent of the payments they receive from cooperatives from their taxable income. Under the other provision, the cooperative itself can deduct 20 percent of whatever money it doesn’t distribute to farmer members.
Some farmers and cooperatives will pay somewhat less tax under the new system while others will pay slightly more, but overall it’s likely to be similar to Section 199, said Darisse.
“Generally, it came out, in our opinion, to a very good place,” he said.