Tax law gives unexpected break to farmers who sell to co-ops

Seward Co-op
A colorful, fresh produce department featuring seasonal and local foods at Seward Co-op, Oct. 21, 2013 in Minneapolis.
Jennifer Simonson for MPR News 2013

Key senators and farm groups are trying to fix a provision in the federal tax overhaul that gave an unexpected tax break to farmers who sell their crops to cooperatives rather than regular companies.

Lawmakers say they didn't intend to give a competitive advantage to co-ops. But it's not clear they can rework the legislation given the partisan divide on Capitol Hill. That means many companies — from local grain companies to agribusiness giants such as Cargill and ADM — could wind up paying more for crops than co-ops.

The provision from GOP Sens. John Thune of South Dakota and John Hoeven of North Dakota surfaced in the final days of the debate over the tax bill, which President Donald Trump signed last month. Thune and Hoeven wanted to replace a deduction that benefited co-ops in the old law, which was being dropped, and they wanted to make sure farmers didn't wind up with a tax increase.

But the final language went further than maintaining the status quo.

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"I think at the end of the day what it boiled down to is the staff didn't know what they were doing. ... They rushed this thing through," said U.S. Rep. Collin Peterson of Minnesota, the ranking Democrat on the House Agriculture Committee.

Agricultural co-ops are typically owned by farmers, and they provide their members with help with marketing crops, purchasing supplies and various other services. They range from small and local co-ops to big, nationwide ones such as Land O' Lakes and Sunkist Growers.

The new provision lets farmers deduct 20 percent of their gross sales to co-ops, but only 20 percent of their net income if they sell to other companies. The difference is big enough that farmers who sell to co-ops could entirely eliminate their tax bills.

"If it stands the way it is, you're going to see a dramatic change in who farmers sell their product to," said Paul Neiffer, a partner with CliftonLarsonAllen, a national accounting firm with clients on both sides.

Farmers who do sell to regular companies may be able to command higher prices to help make up for the lower tax break.

Kristine Tidgren, assistant director of the Center for Agricultural Law and Taxation at Iowa State University, calculated that a farmer with $300,000 in income from grain sales to a regular company and $180,000 in expenses would have $86,400 in taxable income for the year. If that same producer sells to a co-op, she said, the farmer would have just $48,000 in taxable income.

"It's a huge difference. ... We've tried to tell everyone to hold on and see what happens before you make any major changes to your business," she said.

Hoeven's chief of staff, Ryan Bernstein, said the senators didn't intend to give a competitive advantage to co-ops and their farmer-patrons. They've been working with the National Grain and Feed Association, the National Council of Farmer Cooperatives and other parties to find a quick solution, he said.

Greg Ibach, undersecretary at the U.S. Department of Agriculture, said the tax code shouldn't "pick winners and losers" and the agency expects a correction.

The new tax break has at least one defender, the North Dakota Farmers Union. The group's president, Mark Watne, said efforts to change it "may not be in the best interest of farmers or the viability of cooperatives."

Spokespeople for Thune and Sen. Pat Roberts of Kansas, chairman of the Senate Agriculture Committee, said they're supporting efforts to fix the provision.

Randy Gordon, president of the National Grain and Feed Association, which represents co-ops as well as regular companies, said there's been progress in the past week. He said in a newsletter Wednesday that all sides have held several meetings and conference calls to explore alternatives.

Minnesota-based Land O'Lakes, the country's third-largest agricultural co-op, and Illinois-based ADM both said they look forward to a fix.

But it won't be simple. Bernstein said Hoeven and Thune are looking at attaching it to must-pass legislation, likely a big spending bill expected to come up late next month. That assumes that everyone agrees on a solution by then.

Even a must-pass bill likely would require 60 votes to pass the Senate, which would require some support from Democrats.

"All it's going to take is a couple Democrats in the Senate to derail the whole thing. ... I'm willing to help, but it looks like a long shot to me," Peterson said.