How Much is the Co-op Deduction Really Worth?

We have seen multiple copies of letters floating around touting the tax benefit of the new Section 199A for delivery of grain to a co-op based on dollars per bushel saved.  Remember, in order to get this new deduction, you must both sell to the co-op AND be a patron of the co-op.  If you are not a patron, you do not receive the extra co-op Section 199A deduction.

A simple way of looking at the savings to the farmer is to take their tax bracket and multiply it by 20%.  For example, if the farmer is in the 35% tax bracket, the maximum savings is 7%.  However, if the farmer does not sell to the co-op, they will likely qualify for the regular Section 199A deduction of 20% of net farm income, so the likely tax savings due to selling to a co-op is simply 80% of the maximum number.  In the case of a farmer in the 35% tax bracket, it would be equal to 5.6%.  He farmer growing corn would then like to see how much cents per bushel this equates to.  We are providing a simple chart that shows these savings assuming a farmer sells the crop for $3.50 as follows:

 

We thought it would be good to also run some analysis and try to determine what this “actual” per bushel savings might be based on a farmer trying to get their taxable income to zero using the following assumptions:

  • A farmer has net farm income AND taxable income of $1 million, $500,000 and $100,000,
  • He can sell corn for $3.50 per bushel,
  • He is trying to limit his taxable income to zero with the Section 199A co-op deduction,
  • He is a Schedule F farmer.

Here is a chart showing the results:


Line 1 is simply the taxable income of the farmer

Line 2 is the number of bushels at $3.50 per bushel needed to get a Section 199A co-op deduction to complete offset taxable income.  For example, 1,428,571 bushels times $3.50 is $5,000,000 times 20% equals $1 million which will bring taxable income to zero.

Line 3 shows the amount of income tax owed if no Section 199A deduction was allowed.

Line 4 shows the tax assuming that the farmer would qualify for the regular Section 199A deduction which is 20% of net Schedule F income limited to 20% of taxable income.  In the case of the $1 million farmer, his tax would be calculated on the basis of $800,000 of taxable income.  This is the maximum tax that can be saved by the farmer selling to the co-op versus a non-cooperative sale.

Line 5 simply divides the savings on Line 4 into the number of bushels on Line 2 to arrive at the absolute maximum savings per bushel for the farmer.

Line 6 determines the amount of savings per bushel if the farmer delivers an extra 50% of bushels to the co-op.  In this case, his savings per bushel will decrease since he is getting the same amount of net deduction.  In the $1 million example, if the farmer delivers and extra 714,285 bushels, his gross Section 199A deduction increases to $1.5 million, but he can only deduct $1 million.

Line 7 shows the savings per bushel if the farmer’s net taxable income ends up being 50% less than planned due to various other deductions, etc.

As you can see from the table, the net savings to the farmer ranges from a low of 3 cents to a high of 17 cents.  The actual savings is likely somewhere in the middle.  Plus, this table does not show the actual bottom line tax still owed by the farmer due to self-employment tax.  The Section 199A deduction does not reduce self-employment income, therefore, the farmer will still owe SE tax which will be about $15,000 for the $100,000 farmer up to about $52,000 for the $1 million farmer.  Once you factor in these taxes, the actual savings per bushel will go down since the farmer could reduce this tax by perhaps buying additional equipment, etc.

Remember also to factor in differences in price offered by the co-op versus a non-co-op, and cost differences such as transportation. A farmer really only has an incentive to deliver bushels to a co-op up to the point where his tax savings per bushel is greater than additional return via increased price or reduced transportation or storage costs by delivering to a non-co-op.  Once that point is reached, the farmer should sell to whoever offers the best net price since the co-op will no longer deliver any additional “tax savings”.

This example has been based upon our interpretation of the actual new Code Section 199A. We have not seen IRS regulations and until we do, this example could change and it could be material.

We will keep you posted.

 

  • Principal
  • CliftonLarsonAllen
  • Yakima, Washington
  • 509-823-2920

Paul Neiffer is a certified public accountant and business advisor specializing in income taxation, accounting services, and succession planning for farmers and agribusiness processors. Paul is a principal with CliftonLarsonAllen in Yakima, Washington, as well as a regular speaker at national conferences and contributor at agweb.com. Raised on a farm in central Washington, he has been immersed in the ag industry his entire life, including the last 30 years professionally. In fact, Paul drives combine each summer for his cousins and that is what he considers a vacation. Leave a comment for Paul. If you would like to leave a comment for Paul, follow the link above, however, please make sure to include your email address so that he can reply to your comment (your email address will not automatically show up).

Comments

Why is this deduction being offered to farmers selling to co-ops vs. private grain companies? I have family members that own a private grain company that has been in our family for over 100 years. They will be at a huge disadvantage if this is actually becoming law. I have farmer family members as well.

The examples are commodities such as milk or grain where, I think, the co-op actually buys the commodity. Would 199A apply to a co-op that was the commission agent for cattle sales, or would the co-op actually have to be the buyer of the cattle?

very confusing. you say that if a farmer does not sell to a co-op, the farmer qualifies for a REGULAR 199A deduction of 20% of farm income. Did you explain what the NEW 199A deduction is, and how it is different than the regular 199A deduction? Where does the article explain the details of the 199A deduction selling to a co-op vs. the regular 199A deduction of 20% of farm income?

Paul,
Are you saying farmers are never going to pay tax again? I think you better re-read this bill if you are.

Thanks Paul. Do Co-ops already issue 1099s for the patronage info to corporations? Will they need to start issuing them to corps if they don’t already?

If it is important to be a member of a co-op, then please forgive the naïve questions?

How does one become a patron of a co-op?

How does one know a co-op from a non-coop?

Can an S Corporation receive the per unit retain allocations and therefore reduce its income to zero?

S corporations and partnerships are essentially ignored. They will pass through the details needed for the shareholder to calculate the Section 199A deduction which will allow them to reduce their taxable income.

Leave a Reply

Your email address will not be published. Required fields are marked *

Subscribe to Our Email List

* indicates required