Cooperative Sales Could Reap Tax Breaks, or Not, While C-Corps Lose Some Attraction

While members of Congress try to deconstruct a tax-law change that drives farm sales to cooperatives over private companies, farmers are taking advantage of the law change and wondering whether they will get to continue reaping the rewards. Then there are the farmers who would like to take advantage of some of the new 20% tax breaks for pass-through income, but they sell their commodities through C corporations. Instead of a tax deduction, they could face higher tax rates if they do not restructure those corporations. In the run-up to completing the new tax law, some in Congress worked to offer a counter tax deduction for grain cooperatives. The new provision on "qualified cooperative dividends" from cooperatives was written to benefit not just any patronage dividend, but also any "per unit retain allocation." That translated into any amount paid to patrons for products sold for them. The language also broadens out further into any revenue from a farmer cooperative "that is includible in gross income." The tax break amounts to 20% of all income that comes from those dividends or sales from a farmer cooperative. "That's the problem is it's extremely broad," said Paul Neiffer, an accountant and principal with CliftonLarsonAllen. "It's essentially any payment a cooperative gives to a farmer, including purchasing their crop."If Congress had limited the provision strictly to patronage dividends, then it would be a much smaller issue. And after the implications were flushed out a little bit earlier this month, Sens. John Hoeven, R-N.D., and John Thune, R-S.D., began working with groups representing farmer cooperatives and grain companies to correct the language in the new law.