The new tax bill has brought potential changes to the agricultural sector. While the bill removed the nine percent domestic production activities deduction that cooperatives previously received or allocated to their members it introduced a new deduction to replace it.
The bill provides a deduction of up to 20% of qualified cooperative dividends. For farmers who sell directly to farm cooperatives, this includes not only the patronage dividends, but also per-unit retain allocations which equate to sales made to the cooperative. Alternatively, it provides a deduction of 20% of net income to farmers who sell directly to a non-cooperative.
For example, suppose a farmer has $250,000 in annual sales and $50,000 in net income. If the farmer makes all sales to a cooperative and therefore all the income is considered per-unit retains, that farmer would receive a deduction of $50,000 ($250,000 sales X 20%) and would eliminate the entire income-tax liability ($50,000 net income less $50,000 deduction). However, if that farmer makes all sales to an independent operator, the deduction would only be $10,000 ($50,000 net income X 20%), leaving $40,000 in taxable income.
Although the IRS hasn’t had a chance to issue regulations to provide further guidance this provision currently appears to significantly alter the tax liability of farmers. Recent news indicates these consequences may have been unintended and lawmakers are considering corrective measures but specific details have not been provided.
All who could be affected by this change are encouraged to contact their WK advisor with questions.