An amendment co-authored by North Dakota Sen. John Hoeven to the huge tax cut bill passed by Congress late last year provides generous tax breaks to farmer-owned cooperatives and to farmers who sell grain to them. But it could create real problems for privately owned elevators. If it’s not fixed, somehow, there’s not a farmer anywhere who is going to want to do business with private elevators.
As the tax bill entered its final days in December, the bill’s authors (whoever they were) eliminated what was known as the Section 199 tax deduction, also known as the Domestic Production Activities Deduction, a tax break for businesses that perform domestic manufacturing and certain other production activities (like farming). It was established by the American Jobs Creation Act of 2004 in an effort to ease the tax burden of domestic manufacturers and as a result make the investment in domestic manufacturing facilities more advantageous. The IRS later ruled it applied to farming as well. As of the day Donald Trump signed the tax bill, it no longer exists.
Farm groups found out about it and lobbied like crazy to hold on to Section 199 the last weeks before the bill’s passage, but to no avail. Then somehow Hoeven snuck in a last-minute amendment that put back in a form of the deduction, but only for farm cooperatives, and greatly increased its generosity. Beneficiaries are the co-ops, and the farmers who sell their grain to farm cooperatives, such as CHS or Land O’Lakes, or their local equity elevator, owned by its members. Under the amendment, the co-ops can take the deduction or pass it along to the farmers. In theory, it doesn’t really matter because the farmers own the co-ops.
The problem is, it only applies to those cooperative-owned elevators. There’s another section of the new law that applies to farmers who sell their grain to local privately owned elevators or giant corporate-owned elevators like Cargill and ADM. They won’t get the tax break, which is substantial. So instead of a tax cut from this bill, those farmers could be facing big tax increases.
The result is no one will want to sell to private elevators. If a farmer is not a member of a local co-op now, he’s going to want to be pretty quickly. Because for farmers selling a million dollars worth of grain, which is not unusual these days, the difference in taxes could be as much as $80,000. That’ll buy a new pickup. A nice one.
I learned of this from a brother-in-law of mine who’s a CPA and does accounting work for a number of elevators, both co-op and private. He’s been talking to congressional staffers about the problem and says it is not going to be an easy one to solve.
According to the agribusiness website Feedstuffs, a news source that’s part of the Farm Progress Network, Hoeven secured the co-sponsorship of Sen. John Thune, R-S.D., for the amendment, and then went to bat for it as the final version of the bill emerged in late December. The amendment allows for a 20 percent tax deduction on payments farmers receive from a farmer-owned cooperative. But the same deduction isn’t available for payments from private elevators. So where do you think a farmer is going to want to sell his grain?
Co-ops around the country are ecstatic, and are heaping praise on Hoeven. Jay Debertin, president and CEO of Cenex Harvest States, the largest co-op in the country, said “The Section 199 deduction helped create jobs and broaden the tax base in many rural communities and the loss of the deduction would have had impacts far beyond agriculture. Sen. Hoeven has prevented that scenario through his efforts to make the new tax code work for co-ops and their members.”
BUT ONLY FOR CO-OPS.
Chris Policinski, president and CEO of Land O’Lakes, another large co-op, and Jim Mulhern, president and CEO of the National Milk Producers Federation, also singled out Hoeven for praise.
For now, private elevator owners are keeping mum while they analyze their situation. North Dakota has about 400 elevators. Probably half are co-ops, half are private.
There’s no easy fix. The loss of the Section 199 deduction for private elevators is law. It’ll take a new law to fix it. A new law is likely to need 60 votes to pass the Senate. When’s the last time anything got 60 votes in the Senate?
Hoeven’s been a consistent champion for co-ops, but I’m not sure how he pulled this off. It happened in the last minutes, and I’m guessing a lot of things happened in the last minutes in this bill. That’s the danger of having a partisan bill pass on a party-line vote with no hearings. No one knows what’s in the bill.
Don’t weep for Cargill and ADM. They will survive. It’s the small, rural elevators that are in trouble. Stay tuned.
P.S. I’m an English major. This is pretty confusing stuff. If I have this wrong, and you’re a CPA or a math major, tell me, and I’ll try to fix it.