Tax Reform Priorities
NCFC supports the continuation of Subchapter T of the Internal Revenue Code (the basis for cooperative taxation) and related regulations. NCFC also supports the continuation of the patronage dividend deduction for farmer cooperatives. The deduction is critical for the continued viability of farmer cooperatives.
NCFC urges Congress and the administration to take into account the unique tax status of farmer cooperatives when developing tax reform proposals. NCFC is concerned that several reform proposals would negatively impact farmer cooperatives, and that a lowered corporate rate would not help to offset those impacts.
Farmer cooperatives are owned and governed by their farmer members. Earnings from business conducted with or for a cooperative’s members are subject to single tax treatment as income of farmer members, provided the cooperative pays or allocates the earnings to its members. If the earnings are used to support the cooperative’s capital funding or other needs, the earnings are taxed at regular corporate rates when retained and taxed a second time when distributed to the farmer members. Earnings from sources other than business, with or for the cooperative’s members, are taxed at corporate rates.
Issues of Concern:
NCFC Supports Maintaining the Patronage Dividend Deduction. Patronage refunds are paid out based on the amount of product delivered or business done by the member with the cooperative. For example, a cooperative receives product grown by the farmer-member and makes an advance payment. Following the sale of the product, the cooperative makes an additional payment reflecting the profit made on the sale. Under well-accepted tax principles, the total business expense deduction taken by the cooperative should include both the advance payment and the patronage dividend. Under long-held principles of tax fairness, the patronage dividend deduction should remain in the IRS Code.
Patronage Dividends Should Not Be Taxed at a Higher Rate than Other Pass-through Income. For cooperatives to continue to thrive, tax reform should provide that a farmer's transactions with a cooperative should not be taxed at a higher rate than the farmer’s transactions with other business entities. Specifically, if a lower rate of individual tax applies to the pass-through income of a farmer, a lower rate should also apply to patronage dividends received from a cooperative.
NCFC Opposes Repeal of the Section 199 Deduction for Domestic Production Activities Income. The Section 199 deduction was enacted as part of The American Jobs Creation Act of 2004 as a jobs creation measure. The deduction applies to proceeds from agricultural or horticultural products that are manufactured, produced, grown, or extracted by cooperatives, or that are marketed through cooperatives, including dairy, grains, fruits, nuts, soybeans, sugar beets, oil and gas refining, and livestock. Cooperatives may choose to keep the deduction at the cooperative level, or pass it through to their farmer members, making it extremely beneficial to both. Section 199 benefits are returned to the economy through job creation, increased spending on agricultural production and increased spending in rural communities.
Some have suggested lowering corporate rates to offset the impact of the loss of the deduction. However, because farmer cooperatives’ income is passed through to farmer members, a corporate rate reduction would not benefit cooperatives and their members.
NCFC Opposes Repeal of the Deduction for Interest on Debt. Farmers do not have the resources to satisfy all of their cooperatives’ capital needs. As a result, cooperatives in many cases rely on debt to finance growth. The repeal of the deduction for interest on debt would cause harm to farmer cooperatives that are attempting to expand operations. Repeal of the deduction would prevent cooperatives from new hiring, expansion and new product development.
NCFC Opposes Repeal of LIFO Accounting Method. The last-in, first-out (LIFO) accounting method is a widely accepted accounting method and is used by some farmer cooperatives. Taxpayers using LIFO assume for accounting purposes that inventory most recently acquired is sold first. If LIFO is repealed, farmer cooperatives and other businesses would be taxed as though they had sold all of their inventory assets, even though they would have received no cash. Obtaining the funds necessary to pay the tax on this deemed sale would cause severe strain on cooperatives’ capital budgets. Taxation of LIFO reserves would be the equivalent of a retroactive tax on the savings of a cooperative.
“Border Adjustability” Should Not Disadvantage Agricultural Production. The House GOP’s proposal to disallow a tax deduction for imported goods would place a great disadvantage on businesses rely on goods that are not available in the U.S. For instance, farmer cooperatives that manufacture fertilizer must import potash. Those that refine petroleum also rely on importing and would be harmed by the disallowance of the deduction, which is essentially a 20% tax on all imported goods. With regard to the treatment of exports, cooperatives should be allowed to pass the benefit of tax-free exports through to their members.
Reinstate the Alternative Fuel Mixture Credit. NCFC supports reinstating the alternative fuel mixture credit, which expired on December 31, 2016. The credit incentivizes use of propane, a clean-burning, low-carbon, domestic, and economical alternative to gasoline and diesel.