Is the Section 199A provision good or bad?
The recent tax bill out of Washington has caused a bit of a stir with its "199A tax reform provision." According to some commentators, this provision causes favoritism for cooperatives over other corporate grain buyers. A recent Agweek article quoted one grain manager as saying there is an artificial 15 to 20 cent per bushel advantage held by co-ops over non-co-ops.
The 199A provision is part of the Tax Cut and Jobs Act. The provision was designed to cut taxes and simplify the code. The Section 199A provision sunsets in 2025, but until then is designed to increase from 9 percent to 20 percent a certain deduction cooperative members can take on their income taxes. The deduction is basically a deduction based upon percentage of sales by cooperative members. Partly because of feedback regarding the Section 199A provision, there are questions as to whether this provision will remain as is. Word out of Washington is that Congress is close to fixing it through a continuing resolution that will be voted on March 23.
There are two sides to every story, and whether or not the Section 199A provision is a good or bad thing depends upon your perspective. The truth is nobody knows for sure what effect this will have in the short term. Depending upon which agricultural economist, accountant or lawyer you speak with, the opinion on the Section 199A provision will be different.
For me, the interesting tilt is the opinions some have that this will cause the formation of more farmer-owned cooperatives. One recent Agweek article by Mikkel Pates was entitled "Biggest co-op run since the '20s?" Again, nobody knows if this is going to happen. But there is no doubt that the present law does present some economic incentives to at least consider formation of a cooperative.
Additionally, several farms are soon to be "turning wheels," which means they will be faced with decisions on purchasing inputs, such as fertilizer and seed. For farmers who have a purchasing choice between co-ops or non-co-ops, some may lean toward doing business with the co-op in the hopes that it may make a difference when they compute their taxes at year-end.
Generally, co-ops are granted favorable tax status by Congress because co-ops are designed to operate at cost. Any profit made by a co-op is to flow through to the members — also known as patrons — of the co-op, who are also the owners of the cooperative. What this results in is a tax form received by the patron of the cooperative: the 1099-PATR. The patron then pays income tax on the cooperatives' profit, but that income tax burden is based upon the patron's own individual tax rate.
A cooperative is basically a corporation that distributes its profits to it members according to the level of patronage that member has with the cooperative. The more business you do with the cooperative, then the higher your patronage dividend, so long as the cooperative makes a profit. A typical co-op has a manager, who is in charge of day-to-day operations, and that manager typically reports to a board of directors.
The board of directors of a cooperative has several duties to carry out for the members/patrons. There are several state and federal laws that impose liability upon the cooperative if these duties aren't followed. In fact, if a cooperative director acts outside the scope of their duties, there can even be personal liability imposed upon that director. So, being on the board of directors is not as easy as it seems. And when times are tough, it can be stressful and time consuming.
Formation of a cooperative is not a simple thing. Consult a professional familiar with the formation of co-ops before undertaking such a project.