How The Tax Bill Affects Coops

Published on January 29, 2018

By the time you read this post, it is likely that President Trump has already signed the new Tax Act. Today’s post has been prepared by Rebecca Smith.  She is our director of tax for cooperatives.  This post if fairly long, but we want to get the information to our cooperative clients.  We would strongly suggest talking the tax bill over with your tax advisor now since there may be some actions needed before year-end.  

Tax Reform overall appears to be a win for cooperatives as well as their patrons.  A key change is the repeal of the Section 199 deduction which many cooperatives and their patrons have benefited from since its inception in January 2005. For cooperatives that currently benefit from the deduction and/or pass it through to patrons please consult your tax advisor prior to December 31st to discuss the implications. 

A new deduction for agricultural cooperatives has been added for tax years beginning after December 31, 2017 and may be as beneficial to cooperatives as the Section 199 deduction. The deduction is provided for in Section 199A; it is calculated for the cooperative and the patron independently and there is no pass through provision as previously provided for under the Section 199 deduction. For additional information on the deduction available for agricultural cooperatives please see the example included below. 

Deductions

Repeal of Section 199 deduction

  • Effective for taxable years beginning after December 31, 2017

  • 20% deduction for qualified business income (New)

  • Effective taxable years beginning after December 31, 2017 and before January 1, 2026

  • Applies to specified agricultural or horticultural cooperative

  • An organization to which Part I of subchapter T applies which is engaged in

  • Manufacturing, production, growth, or extraction in whole or significant part of any ag or horticultural product,

  • Marketing of ag or horticultural products which its patrons have manufactured, produced, grown, or extracted, or

  • Provision of supplies, equipment, or services to farmers or to organizations described in the first two bullets

  • Lesser of

  • 20% of the cooperative’s excess gross income over qualified cooperative dividends (Qualified cooperative dividends include patronage dividends, per-unit retain allocations, qualified written notices of allocations, or similar amounts) or

  • The greater of

  • 50% of the cooperative’s W2 wages or

  • The sum of 25% of the cooperative’s W2 wages plus 2.5% of the unadjusted basis immediately after acquisition of qualified property of the cooperative

  • The deduction cannot exceed the taxable income of the cooperative for the taxable year

  • Example: ABC Cooperative is an agricultural cooperative and their tax year begins 09.01.18. For this tax period the cooperative’s gross income is $326M, qualified cooperative dividends is $155M, W2 wages for 2018 is $9.6M, the unadjusted basis of qualified property is $7.3M, and the taxable income is $2M. The amount of the deduction is the lesser of $34.2M (20% x ($326M gross income – $155M qualified cooperative dividends)) or $4.8M (greater of $4.8M (50% x $9.6M of W2 wages) or $2.582M (25% x $9.6M of W2 wages plus 2.5% x $7.3M of qualified property)). Therefore the calculated deduction for the cooperative is $4.8M, however it is limited to $2M, the taxable income of the cooperative. 

    Limitation on business interest

  • Effective for tax years beginning after December 31, 2017

  • Exempt from limitation = Average annual gross receipts under $25M during the three preceding years, indexed for inflation

  • Deduction for business interest shall not exceed the sum of

    • Business interest income plus

    • 30% of adjusted taxable income (cannot be less than zero)

  • Determined at the tax filer level; however for pass through entities the determination is made at the entity level

  • Business interest = Interest paid or accrued on indebtedness properly allocable to a trade or business; does not include investment interest

  • Adjusted taxable income = taxable income excluding business interest expense, business interest income, net operating losses, the 20% deduction for qualified business income, and other adjustments as proved by the Secretary of Treasury (for tax years beginning after December 31, 2017 and before January 1, 2022 deductions for depreciation and amortization are excluded from taxable income)

  • Carryforward – If disallowed treated as business interest paid or accrued in the succeeding tax year (indefinite)

  • Irrevocable election out

  • Specified agricultural or horticultural cooperative

    • Farming business (trade or business involving cultivation of land or the raising or harvesting of any agricultural or horticultural commodity)

      • Required to use ADS to depreciate any property with a recovery period of 10 years or more (Effective tax years beginning after December 31, 2017) 

        Expensing depreciable business assets

  • Section 179

    • Effective tax years beginning after December 31, 2017

    • Maximum expensing = $1M

    • Phase-out threshold amount = $2.5M

    • Includes qualified real property

  • 100% expensing

  • Cost of qualified property acquired and placed into service after September 27, 2017 and before January 1, 2023

  • New and used property

  • Extending by four more years

    • 2023 = 80%

    • 2024 = 60%

    • 2025 = 40%

    • 2026 = 20%

  • Transition rule = first taxable year ending after September 27, 2017 may elect 50% allowance instead of 100%

  • 15 year recovery period and straight line depreciation for qualified improvement property for property placed in service after December 31, 2017 (20 year for ADS)

Limitation on losses

    • Effective for tax years beginning after December 31, 2017
    • Limits the NOL deduction to 80% of taxable income
    • Eliminates the carryback option; indefinite carryforward of NOLs

Dividends received deduction

    • Effective tax years beginning January 1, 2018
    • 70% to 50%
    • 80% to 65%

Tax Rate and AMT

  • 21% flat corporate tax rate

  • Effective tax years beginning January 1, 2018
  • Note: Important to analyze the impact to the financial statements due to restatement of deferred tax assets/liabilities
  • Alternative Minimum Tax

  • Repealed for tax years beginning after December 31, 2017
    • Credit is refundable for any taxable year beginning after 2017 and before 2022 = 50% of the excess of the credit for the taxable year over the amount of the credit allowable for the year against regular tax liability (100% for taxable years beginning in 2021) 

      Other

      Like kind exchanges

  • Limits its application to real property not held primarily for sale
  • Exchanges completed after December 31, 2017

Accounting methods

  • Effective for taxable years beginning after December 31, 2017
  • Annual average gross receipts do not exceed $25M for the 3 prior taxable-year period
    • Can use cash method
    • Not required to account for inventories under section 471 (Note: Deduction for inventories under the cash method must be deferred until the inventory is sold)
    • Exempt from uniform capitalization rules

 (Source: CliftonLarsenAllen - Agribusiness Blog - Farm CPA Today - December 22, 2017)