Cornhusker Economics: Tax Strategies with the New Section 199A
This tax season will be the first time cooperatives and their patrons will consider the income tax consequences of the Tax Cuts and Jobs Act of 2017 (TCJA). A key element of the TCJA, Section 199A, affects farm income tax liability. Not only is the Section 199A deduction a good tax break for farmers, it changes incentives for farmer patrons to market through cooperatives. It also changes incentives for how cooperatives distribute their income. Cooperative members, their boards of directors, and management teams will have many tax strategy options to consider in 2019.
The good news about Section 199A is that it may reduce farmer income tax liability. The TCJA lowered income tax rates for corporate farms to 21%.. Section 199A was developed to provide an income tax deduction for unincorporated farms. Subject to certain limitations, Section 199A allows non-corporate farms to receive a 20% deduction on farm income.
Farmers marketing through a cooperative, however, may only qualify for a modified deduction. Income tax laws consider cooperatives as extensions of a farmer's own operations. Section 199A allows cooperatives to deduct up to 9% of their income from their corporate income tax liability, to a maximum value of 50% the co-op’s wages paid for marketing activities. Farmers benefit from this deduction by virtue of potentially increased patronage allocations (made either in cash or non-cash allocations). In other words, the deduction allows the cooperative to pass through more income to the farmer than otherwise. Section 199A is written in a way that reduces the farm income tax portion of the 199A deduction so as to potentially reduce a farmer’s ability to “double-dip” the deduction’s benefits.
Farmers should be aware, however, that cooperatives can take steps to offset these modifications.
Continue reading the Jan. 30, 2019 Cornhusker Economics to learn more about the three options available to cooperatives.