Be Careful of Processing Cooperatives
As we have posted previously, farmers who deal with a cooperative in 2018 likely have three buckets of income. For farmers who sell to a marketing cooperative (most grain farmers), this is fairly straight-forward. Bucket #1 includes all of the payments received from the cooperative before the cooperatives 2018 fiscal year-end.
However, many farmers actively participate in what we call a processing cooperative. This would include sugar beet cooperatives; apple and other fruit cooperatives; some cotton & rice cooperatives; and dairy cooperatives (there are likely others but these are the most common).
Most of these cooperatives employ some type of “pool” accounting for determining the net income for the farmer’s products. As the product is processed, the cooperative will make various advances to the farmer and then have a final pool accounting to pass out the final profit to the farmer.
This pool accounting can easily take up to two years (from harvest to final sale of product), therefore, for 2018, farmers who deal with a processor cooperative needs to determine how much of their payments they received from the cooperative are related to these 2017 crop “pools” that were paid during 2018. It does not matter if the payment was received after the cooperative’s year-end. What is important is if the cooperative used those “pools” in calculating their old Section 199 returns. If so, none of those payments will qualify for the new Section 199A deduction. Here is an example.
Frank farms in Washington state and delivers his harvested apples during the fall of 2017 to the ABC Apple Cooperative. The cooperative processes these apples from harvest until final sale which occurs in July 2018 and the year-end is July 31. The coop makes three payments to Frank (1) an advance of $450,000 on January 3, 2018, (2) a second advance of $600,000 on May 1, 2018 and (3) final pool closing payment of $750,000 on August 25, 2018. None of these payments will qualify for the Section 199A deduction in 2018 even those the final payment was made after year-end.
As you can see, doing a tax return for a farmer this year is not going to be easy and if the farmer sells to a processing cooperative, it will be even more difficult. But 2019 should be better.
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 Walla Walla, 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. Paul and his wife purchase an 180 acre ranch in 2016 and enjoy keeping it full of animals.
In your previous blogs you mentioned the 3 buckets for coop sales before fiscal year, after fiscal year, and other payments from non coops, and you take the income percentage of buckets 2 and 3 for the QBI calculation but I am wondering about se tax deduction, health insurance deduction, and retirement contribution deduction. Would you take the same percentage for the QBI calculation for all the deductions mention above? or would the deductions be a full 100%? For example say Farmer has bucket 1 percentage of 20%, bucket 2 of 40% and bucket 3 of 40% and net income of $100,000. Your QBI would start at 80,000 to exclude bucket 1 and then subtract your se tax, se health, and retirement. Would you use 100% (100,000 x .9235 x .153 x .5 = 7064.78) or 80% of SE tax (7064.78 x .8)?