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 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 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.
NCFC Opposes Repeal of Lower of Cost or Market Accounting Method. Using this method, the taxpayer determines an asset's value using either the original cost or the current replacement cost, whichever is lower. The repeal of this method would harm supply cooperatives because their inventories are comprised largely of commodities susceptible to large variations in value. When commodity prices decline (as in 2009), supply cooperatives must drastically devalue those commodities to reflect a proper carrying value for financial reporting purposes. The repeal of the lower of cost or market accounting method would result in supply cooperatives effectively pre-paying substantially higher income taxes as a result of the disallowed deduction. Key commodities for supply cooperatives include fertilizer; pesticides, herbicides and other agricultural chemicals; grains; feeds; and petroleum products, including diesel, propane and heating oil.
NCFC Opposes Elimination of 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. Eliminating the patronage dividend deduction would contradict long-held principles of tax fairness.
Farmer Cooperatives Should Not Be Treated as “Passthrough” Entities. While cooperative earnings are distributed to member-patrons and taxed at the patron level, cooperatives should not be viewed in the same category as partnerships, S corporations, LLCs, or other passthrough entities. Farmer cooperatives are owned and governed by their farmer members and “stand in the shoes” of their members. Farmer cooperatives generate jobs in rural communities and contribute to the economy in all sectors of agriculture and in all geographic regions of the United States. Farmer cooperatives enable their farmer members to bargain for better prices for their products and more favorable terms from their input suppliers. Earnings from those activities should be taxed only once – at the farmer level.
Taxes on Imports 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.