Q: Could a co-op member receive a deduction in excess of 20%?
A: Yes, depending on how much deduction the cooperative passes through to its members. For example, a farmer with no wages (and joint taxable income less than $315,000) will receive a full 20% deduction on net income from sales to the cooperative, plus whatever deduction is passed through from the cooperative.
Q: Does the definition of “qualified business income” include crop payments (Per-Unit Retains Paid in Money).
A: Yes. PURPIMs were included under prior-law Section 199 and the IRS issued dozens of letter rulings af rming that treatment. The relevant language in Section 199A is identical to Section 199 and the Technical Explanation makes clear that any new regulations should be based on the Section 199 regulations.
Q: How is the provision of supplies treated under Section 199A?
A: The new law incorporates Section 199 Treasury regulations regarding supplies – namely, the definition of “agricultural or horticultural products” eligible for the deduction includes fertilizer, diesel fuel, and other supplies and products with respect to which the cooperative performs storage, handling, or other activities (see Reg. Sections 1.199-3(e)(1) and 1.199-6(f)).
Q: What if a farmer delivers product to a cooperative, but is not entitled to share in patronage dividends and is not otherwise entitled to participate on a patronage basis?
A: The farmer will receive the 20% deduction under Section 199A, but will not apply the reduction outlined above and will not be eligible for a pass-through deduction from the cooperative.
Q: What if a farmer’s operation is a C corporation?
A: C corporations are not eligible for any deduction under Section 199A. Lawmakers wanted to ensure that C corporations receive only the new, lower corporate rate, and not the additional 199A deduction. We are aware that some C corporation farms were taxed at 18% under prior law and are now taxed at 21%. Click here for a checklist for producers considering ownership restructuring in light of this restriction.
Q: What about Section 199 deductions generated in tax years beginning before the enactment of Section 199A?
A: A transition rule provides that Section 199 deductions attributable to taxable years beginning before January 1, 2018, may be utilized by taxpayers. The Technical Explanation specifies:
The proposal clarifies that the repeal of section 199 for taxable years beginning after December 31, 2017, does not apply to a qualified payment received by a patron from a specified agricultural or horticultural cooperative in a taxable year beginning after December 31, 2017, to the extent such qualified payment is attributable to qualified production activities income with respect to which a deduction is allowable to the cooperative under former section 199 for a taxable year of the cooperative beginning before January 1, 2018.
For more information on Section 199A, we suggest you consult your CPA or tax advisor for advice on your particular tax situation. In addition, the Joint Committee on Taxation issued a Technical Explanation of the bill and included over twenty pages on Section 199A.
All information provided as a resource from Land O’Lakes and the National Council of Farmer Cooperatives. You may print this full FAQ document here.