Section 199A(g) Deduction

NCFC Position: 

Farmers face risks very few industries encounter. Investing in America’s farming families and communities is a smart economic policy. NCFC urges Congress and the administration to account for the unique tax status of farmer cooperatives when developing and implementing tax reform proposals. Specifically, Section 199A, including provisions related to farmer co-ops (Section 199A(g)), should be made permanent to keep the competitive balance between corporate and noncorporate businesses. Extending these tax provisions will prevent uncertainty as producers plan for future investments.

Action:

Section 199A puts co-ops and small businesses on an even footing with big corporations which saw a significant decrease in their tax rate in 2017. It was a success and critical in seeing farmer co-ops and their members thrive through a pandemic, global unrest, and the highest inflation in a generation.

Congress should stand up for agriculture and extend this important tax provision. Since farmers and their co-ops are not taxed like corporations, letting Section 199A expire will raise taxes on farmer co-ops and their member-owners, putting them at a disadvantage with competitors enjoying a corporate tax rate cut.

Co-ops pass 95% of the deduction back to farmers, who reinvest it in their operations. That benefits the economy through job creation, increased spending on agricultural production, and investment in rural communities. Among NCFC members alone, $2 billion was returned to farmers in 2022.

Current Status:

The remainder of the 118th Congress offers a rare opportunity to educate and prepare for the pending tax debate in 2025. This is important given the high turnover in Congress since enacting the Tax Cuts and Jobs Act (TCJA). For example, only 5 of the 25 Republicans on the House Ways and Means Committee served on the panel when the tax bill was passed in 2017.

Marker bills to make Section 199A permanent have been introduced in both the House and the Senate (H.R. 4721/S. 480). NCFC supports both bills.

The House Ways and Means Committee Republicans have established an online portal for submitting public comments to the recently established GOP Tax Teams regarding key tax provisions set to expire in 2025, including Section 199A. This process loosely resembles a similar action taken in 2017 as Congress began deliberations leading to the enactment of the TCJA.

Additionally, the Senate Finance Committee Republicans recently met to organize tax teams for educational purposes.

Policymakers will face pressure to reach a consensus on extending the sunsetting provisions, and the balance of power in 2025 will significantly determine how the process moves forward. In the meantime, NCFC and our members hope to serve as a resource to members on both sides of the aisle and across both chambers regarding the importance of Section 199A to rural America.

Background:

For over 100 years, farmer-owned co-ops have given individual farmers a fair chance to compete. Farmer co-ops act as bargaining agents, provide market intelligence, and help farmer members engage in value-added processing. Farmer co-ops provide members with all the tools necessary to run a successful farming operation – including credit, financing, feed, seed, fertilizer, fuel, and other crop production products. Farmer co-ops allow individual farmers to participate in the food and fiber system, from the farm to retail – some of the most innovative products and recognizable brands on grocery store shelves are co-op creations.

The benefits of farmer co-ops go well beyond the farm gate, directly supporting rural America. Farmer co-ops provide nearly 200,000 jobs, with a total payroll of more than $13.3 billion. Total profits for farmer cooperatives in 2022 were $12.5 billion; this money is either returned to farmer members or reinvested into the co-op, benefiting the co-op members, and further bolstering local communities. Farmer co-ops are important members of their communities doing everything from sponsoring the local Little League team to helping rebuild after natural disasters.

Farmer co-ops and their members have benefitted from a deduction on domestic production income for almost 20 years. The deduction originated to help U.S. farmers compete against heavily subsidized foreign producers.

The American Jobs Creation Act of 2004 created the Section 199 domestic production activities deduction (DPAD) as a job creation measure. The deduction applied to proceeds from agricultural or horticultural products manufactured, produced, grown, or extracted by cooperatives or marketed through cooperatives, including dairy, grains, fruits, nuts, soybeans, sugar beets, oil and gas refining, and livestock.

Cooperatives could keep the deduction at the cooperative level, or pass it through to their farmer members, making it extremely beneficial to both. Section 199 benefits were returned to the economy through job creation, increased spending on agricultural production, and increased spending in rural communities.

DPAD was repealed in 2017 and a new Section 199A(g) was enacted through the Bipartisan Budget Act of 2018. Section 199A(g) was written to function like Section 199.