Lawmakers under pressure to fix provision news monitor cooking chicken gizzards recipes

A provision in the new tax bill will provide the greatest benefit to farmers while creating the greatest problem for ethanol and private grain companies.

At issue is the new 199A deduction in the tax law that — if it stands — allows farmers to claim a 20 percent deduction on all payments received on sales to cooperatives. For example, if a farmer sells $100,000 in grain to a cooperative, they could claim a $20,000 deduction on business income.

Language added to the new tax law could end up causing farmers to deliver their grain and other commodities largely to cooperatives in order to gain the greatest deduction, says arlan suderman, chief commodities economist with fcstone inc.

Co-ops argue this incentive is good for farmers. They do not deny it is good for business as well. “of course it’s a good thing for a co-op. Of course it makes us more competitive,” says mat brandenburger, operations manager at wheaton-dumont cooperative elevator, which has elevators across the region including hankinson and wheaton, minnesota.Section 199A

Section 199A was intended to safeguard a deduction removed when the tax cuts and jobs act was repealed dec. 23, 2017. Farmer-owned co-ops complained members would lose a so-called section 199 system in which they qualified for the domestic production activity deduction, called a DPAD. Members of co-ops like minn-dak farmers cooperative in wahpeton could deduct up to 9 percent of sales on their income tax. A loss of the provision could cost shareholders an average of $15,000 each, co-ops argued.

Farm organizations are banding together. Seventy-seven businesses in 28 states called on congress wednesday, march 14 to fix problems caused by section 199A, known as the “grain glitch.” minn-kota ag products and red river grain, both of breckenridge, minnesota, signed this letter to speaker of the house paul ryan, senate majority leader mitch mcconnell, house minority leader nancy pelosi and senate minority leader charles schumer.Dravland says

“we are concerned that language in the tax cuts and jobs act has fundamentally disrupted the agricultural economy by giving farmers, ranchers and dairy producers a substantial tax incentive not to sell their products to thousands of independent companies across the american heartland. If congress does not fix this unintended glitch in the law, countless businesses — including thousands of small, family-owned independent companies — will be forced into costly restructuring, selling to rivals or going out of business. This will not only destroy home-grown jobs and rural economies, but it will also disrupt the supply chain for agricultural products and destabilize the market for everything from milk and grain to meat and poultry,” the letter statea.

Opponents want to restore the original intent of the law by providing farmers with a deduction they previously claimed on net income from their sales to farmer-owned cooperatives, without hurting independent operators.Dravland says

Creating a fix will not be easy since farmers already gained this 20 percent deduction on their gross sales to co-ops in january. They wonder how the government can take something away that has been in existence for three months.

“how is that fair?” asks jim dotzenrod, wyndmere farmer and state senator who is a democrat and represents district 26 in the north dakota legislature.

“for us as a co-op to be able to pass this through to the farmers, it’s fantastic,” dravland says. “every one of our farmers is aware of this. They have made the comment this can take their bottom lines from red to black. This is what it is going to take to make them profitable.”

Cooperatives profess this issue of fairness is misplaced considering private grain dealers already have a permanent tax break created when the tax reform bill was designed to cut taxes and simplify the code. Under this provision, corporate tax rates were cut from 37 percent rate to 21 percent.Dravland says permanently.

Being an election year, no one has any idea what to expect for a section 199A fix. All agree the 199A provision was rushed. Lawmakers did not anticipate these problems or shell cooperatives being spurred by private companies seeking the same tax advantages for their customers.

Brandenburger doesn’t want to see the 20 percent deduction removed from the tax bill. “my personal feeling is the producer would be better off if private enterprises bought from a cooperative than to see the 20 percent go away,” brandenburger says.

To counter the cooperative advantage, minn-kota ag products is looking at setting up its own cooperative entity so farmers can sell their grain and still receive the tax advantage.

“as of april 1, we will be buying grain as a cooperative if this doesn’t get changed. Right now the fix is being negotiated … timing is an unknown right now,” said george schuler IV earlier, who is the grain logistics manager and co-owner at minn-kota.Section 199A “this is not a good law.”

Both sides of the issue agree these shell cooperatives will crop up to ensure private companies gain the same advantages. Dravland says they likely will be challenged by the IRS because a co-op is “by the people, for the people, we the people,” he says.

A cooperative is a type of business formed by a group of people to obtain services more effectively or more economically than they can get on their own. Members of cooperatives own, finance and operate the business for their mutual benefit, according to NDSU extension service. To simplify the cooperative model, it must pay dividends to shareholders.

Section 199A is a case of unintended consequences when circumventing the normal legislative process, dotzenrod says. The provision did not have a public commentary period, which could have limited the issues now cropping up.

Dotzenrod sees tremendous disadvantages for private grain companies and elevators.Dravland says however, he’s not sure there are enough votes to pass a fix.

“to leave it as is, that is not tenable. If you were to leave this and not touch it, outside of go-arounds, the whole world will be cooperatives and no privates will be left. There will be paper co-ops, a complicated gimmick to get around a big mistake. I don’t see how they can leave it as is,” he says.

And no federal leaders want to tell farmers or their lobbying organizations why a provision was removed from the tax bill that finally provides a tremendous tax break.

“rather than trying to repair this blunder and put co-ops on a different footing, take the private ones and give them a similar formula to give them a similar tax break,” dotzenrod says

However, corn he raises typically goes to cargill in wahpeton, which is not a cooperative and cannot offer this 20 percent reduction. He calls this plight sobering because cargill does offer add-ons like paying 10 to 20 cents more per bushel if a farmer agrees to a premium option contract.Percent deduction as grain prices come down, the value of extra add-ons through a company with a good marketing department becomes imperative.

“I can see the incentive is huge, that 20 percent. I think cargill does 35 million bushels of corn every year. Twenty percent of that volume, it’s too much to overcome by shaving off a few pennies and nickels here and there. This would be a big incentive to create a co-op,” dotzenrod says.

Chris johnson of rural great bend cannot take advantage of the 20 percent tax deduction because his farm operates as a C-corporation, and this tax break is intended for an individual farmer.

Johnson is considering changing his status to gain this 20 percent break from gross sales. It’s confusing, but the reduction in tax liability gives farmers hauling to cooperatives a tremendous tax break, he says, because of this reduction on gross sales, while gaining a reduction off net sales to private companies.

“let’s say you have $500,000 gross sales to a co-op and $400,000 in expenses, so you net $100,000.Percent deduction twenty percent of $500,000 is $100,000. The same guy hauling to minn-kota would only receive a $20,000 deduction. The first guy pays no tax and the second guy pays a lot,” he explains, making this a no-brainer for farmers to haul their crops to cooperatives and gain the biggest tax break.

Late winter is when farmers look at markets to sell their upcoming crop, so johnson says if congress enacts this fix, lawmakers better do it soon.

Private enterprises are finding ways around the 20 percent gain to cooperatives. Dravland says lidgerwood co-op elevator immediately extended its hand to hankinson renewable energy, an ethanol plant outside hankinson.

Dravland says this is a win-win for both sides as farmers gain the 20 percent deduction while the plant has the corn it needs to produce ethanol.

“the farmers that deal with (HRE) are our farmers. As a producer, if you can get the full 20 percent back, it’s a good thing.Dravland says you look at $3 corn, that’s 60 cents per bushel. The ethanol plants aren’t going to pay them 60 cents a bushel more than we do for their corn,” he says.