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Grain Elevator Operators Worried about new tax law

By: Jake Putnam
Published in Blog on  January 26, 2018

Washington—Farmer cooperatives and private grain trading companies are working together in an effort to change a provision in the new tax law that could put small grain elevators out of business.

The provision passed last month gives farmers a 20 percent tax deduction on gross sales of crops to farmer-owned cooperatives and a much smaller deduction to private grain elevators, the same deduction to small independent grain elevators or giant companies like Cargill.

Senators on Capitol Hill want to rework the co-op benefit. The co-op tax break is so lucrative that some farmers are looking at forming co-ops to take advantage of the new tax law. 

“It’s devastating to farmers in the Midwest where they have big grain buying co-ops,” said grain marketer Clark Johnston of Agri-source.” No doubt about, If they have any choice whatsoever, they’re going to sell to the co-op where they can make more money.”

Senators John Hoeven, R-N.D., and John Thune, R-S.D., helped write the original co-op provisions and are now negotiating changes with the National Council of Farmer Cooperatives and National Grain and Feed Association. NGFA’s members include both co-ops and private companies, including Cargill Inc. and Archer Daniels Midland Co. as well as small elevators. 

Neil Durrant buys and sells grain in Meridian, he says the impact on his business is minimal. “I talked to the Idaho Wheat Commission and they think they can get this provision off the books within the next year. We don’t have many co-ops in Idaho, so it's not impacting us, but it's clearly something that concerns us.”

The National Council of Farmer Coops said in a press release that the goal of the discussions “is to arrive at an equitable solution that preserves the benefits that cooperatives and their farmer patrons previously enjoyed under Section 199 of the tax code, while addressing any unforeseen impacts on producers’ marketing decisions.”

Senator Hoeven thinks they can work out a compromise in time to include it in an omnibus spending bill that lawmakers hope to pass in February. 

“Everybody is on board and we’ll get it fixed,” said Hoeven, who organized a meeting on Tuesday that included industry representatives as well as aides to several colleagues, including Senate Agriculture Chairman Pat Roberts, R-Kan.

Senator Thune said they were looking at ways to “dial back” the co-op benefit so that private companies won’t get hurt by it and was surprised that the industry didn’t raise concerns about the provision before the tax bill passed.

“Although it was designed to mimic what co-ops got under Section 199 it went farther than that,” according to Thune. 

A co-op member can deduct 20 percent from their sales to a cooperative. For farmers selling to other buyers, the 20-percent deduction only applies to taxable income, or sales minus expenses

Tax accountants say that an unintended consequence of the deduction is that the 199A deduction could easily wipe out a co-op member’s taxable income. 

For a farmer with $5 million in sales to a co-op and $4 million in expenses, the 20-percent deduction would be worth the entire $1 million in profit, leaving no taxable income, according to one accountant. But a farmer who isn't a co-op member would have to take the 20-percent deduction against the $1 million in earnings, leaving taxable income of $800,000 and a total tax bill of $296,000.
"We just want a level playing field," said buyer and marketer Neil Durrant.

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