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FARM CREDIT SYSTEM / FARMER MAC JJAN.U- AFERBY. 22001188
In the February FCW, Ely asked, “Is it time to rethink the taxation of the FCS and ag co-ops? He wrote:
Hopefully an unintended consequence of the major tax legislation enacted in December will be the triggering of a fundamental review of the taxation of the FCS and agricultural co-ops relative to banks and other investor-owned businesses. The intent of this review should be to eliminate differences in the tax treatment of ag-related businesses due solely to their form of ownership. What should trigger this review was the tax legislation’s addition of a new section 199A to the Internal Revenue Code. As a Jan. 9 Wall Street Journal article reported, this new provision “allows farmers to deduct up to 20 percent of their total sales to cooperatives, letting some farmers reduce their taxable income to zero.”
According to the Journal article, this provision could sting large agribusinesses, such as Cargill and Archer Daniels Midland, in addition to smaller private operations as farmers increase their grain sales to ag co-ops to capture the tax savings offered by Section 199A. A subsequent Wall Street Journal article (Feb. 15) reported that while investor-owned grain companies are trying to get Section 199A modi ed so as to reduce its negative impact on them, they may set up their own co-ops so that they can remain competitive with the traditional ag co-ops in purchasing grains from farmers. Although not mentioned in the article, possibly the ag co-ops set up by the grain companies will be able to begin borrowing from CoBank, the only FCS institution authorized to lend to ag co-ops.
Efforts are underway in Congress to modify Section 199A so as to reduce, if not eliminate, the unintended effects it is having on agriculture. However, the longer this section is in effect, the harder it will be to modify or repeal it because grain companies as well as farmers and those who nance agriculture will have adapted to it and therefore will resist efforts to modify it. The furor that Section 199A has created should trigger a congressional review all aspects of agricultural taxation, including the highly favorable tax treatment
the FCS has long enjoyed. While the tax-rate reductions Congress just enacted have helped somewhat to reduce the FCS’s tax advantages on loans secured by real estate, as reported in last month’s FCW, the FCS still enjoys a substantial tax advantage over commercial banks, which is magni ed by the FCS’s favorable funding-cost advantage by virtue of being a GSE. (Farm Credit Watch, Bert Ely, February 2018)
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