OBBBA Gives Lenders a Partial Exclusion on Interest Earned on Certain Loans Secured by Rural or Agricultural Real Property

Renewal of Section 199A(g)

The One Big Beautiful Bill Act, P.L. No. 119-21, made Section 199A(g) permanent by eliminating the December 31,2025 sunset provision in Section 199A(i) of the Internal Revenue Code of 1986, as amended (the “Code”).  Code Section 199A(g) offers a 9% deduction to specified agricultural and horticultural cooperatives on domestic production income.  The following offers a very brief summary of the significance and history of Section 199A(g).  The summary covers Code Section 199, the predecessor to the cooperative provisions in Code Section 199A(g); the original 199A provisions; the adoption of Code Section 199A(g) after the “grain glitch”; and the promulgation by the Treasury Department of final regulations on Code Section 199A(g) in January 2021.  I believe the final regulations to be deeply flawed and illegitimately restrict the full benefits of Code Section 199A(g).

The background to Section 199A, at least as far as agricultural cooperatives are concerned, is old Code Section 199.  Passed in 2004, Section 199 offered a deduction to all entities, including corporations, pass-throughs, individuals and “specified agricultural and horticultural cooperatives.”  American Jobs Creation Act of 2004, 108 P.L. 357, Section 102, 118 Stat. 1418, 1424-1429 “Specified agricultural or horticultural cooperatives” are simply cooperatives under Code Section 1381 that are engaged in the manufacturing, production, growth, extraction, or marketing of any agricultural or horticultural product.  Code Section 199(d)(3)(F).  The Section 199 deduction equaled 9% (beginning fiscal year 2010) of net income from “qualified domestic production activities,” which included manufacturing, production, extraction and growing activities.  Code Sections 199(a), 199(c)(4).  The deduction was limited to 50% of W-2 wages.  Code Section 199(b).

Three provisions of old Section 199 were specifically helpful to agricultural or horticultural cooperatives and their patrons.  First, marketing cooperatives were deemed to have engaged in manufacturing, production, growing or extraction of the products it marketed if its patrons have manufactured, produced, grown or extracted the products.  Code Section 199(d)(3)(D).  Second, the qualified production activity income was not reduced by any Code Section 1382 payment – such as patronage dividends and per-unit retain payments made by the cooperative to its patrons.  Code Section 199(d)(3)(C).  The result was that dozens of cooperatives obtained private letter rulings from the Internal Revenue Service (“IRS”) that the cooperatives could change payments to patrons for agricultural products from “cost of goods sold” to “per-unit retains paid in money” which did not need to be deducted from domestic production gross receipts.  Third, agricultural or horticultural cooperatives could pass through to its patrons some or all of the Section 199 deduction earned at the cooperative level.  This pass through was important because the Section 199 deduction was limited to no more than 50% of W-2 wages, which had the effect of severely limiting the non-cooperative Section 199 deduction for family farmers, who otherwise clearly engaged in a domestic production activity on their farms.

Old Section 199 and the Treasury Regulations thereunder did not require specified agricultural or horticultural cooperatives to divide their net income, or expenses into patronage or nonpatronage buckets, limit their Section 199 deduction to patronage net income, or limit their calculation of W-2 wages to their patronage activities.  Ag Processing v. Commissioner, 153 T.C. 34, 60-61 (2019).

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