Agriculture and the New Tax Law

January 2018 -

What Cooperatives and Farmers Can Expect from the Tax Cuts and Jobs Act of 2017

President Trump earlier this month hailed the new Tax Cuts and Jobs Act of 2017 as a major step forward for U.S. agriculture. ”Our nation was founded by farmers,” Trump told a farming audience in Nashville on January 8. The doubling of the estate tax exemption will keep farms in the same families for generations, while enhanced ability to deduct capital purchases will help farmers grow their businesses.

For Charles F. (“Chuck”) Conner, president and chief executive officer of the Washington-based National Council of Farmer Cooperatives (NCFC), the final bill was notable as much for what it didn’t do as what it did. Conner says he and NCFC’s members for months had feared the bill would result in higher taxes for farmers already challenged by depressed commodity prices. In the end, changes to the bill, driven by legislators from agricultural states, helped maintain key tax benefits for the nation’s agricultural producers, Conner said. He spoke with OUTLOOK about what cooperatives and farmers can expect from the new tax law, who is most likely to benefit, and what they can do to prepare.

OUTLOOK: What’s your bottom-line assessment of the new tax law? Do you gauge it as a positive or negative for cooperatives and their members?

Chuck Conner: Overall it’s going to be positive. We were very nervous when Congress started talking about tax reform. Our concern was that Congress wouldn’t recognize the unique role and tax structure of cooperatives. It’s fundamental to our existence that co-ops be taxed primarily not at the co-op level but rather at the level of individual members. I informed our executive committee that if we could get through tax reform without co-ops and farmers being worse off than they are under the current tax code, I would consider that a victory. I think we’ve achieved that, and may even have come out a little bit ahead.

OUTLOOK: What relieved your fears?

Conner: One of the biggest issues was the repeal of the Section 199 deduction, which applies to proceeds from agricultural products that are manufactured or marketed through cooperatives. Since 2004, that deduction has provided major benefits to co-ops and their members. Most farmers won’t benefit from the tax bill’s major change-reducing the top corporate tax rate from 35 percent to 21 percent-and the loss of the 199 deduction could have left many of our members paying higher taxes. Fortunately, it has been replaced by Section 199A, which allows most farmers to deduct up to 20 percent of their income. That new deduction, along with the lower tax rates for individuals and the new rules on business interest deductibility, expensing, depreciation-all of those changes add up to co-ops and farmers being able to retain more of their money in rural America, where they can reinvest it in facilities and operations. That can only be positive for us.

OUTLOOK: In light of several of the articles published recently about cooperatives gaining an unfair advantage with section 199A, what is your stance on what should happen next?

Conner: NCFC is currently participating in talks with the National Grain and Feed Association and non-cooperative grain companies to develop changes to 199A to address concerns about unintended impacts the provision may have on the competitive balance in the grain sector. Those negotiations remain ongoing, but NCFC believes that an agreement is possible which addresses these concerns while not increasing taxes for farmers.

OUTLOOK: In December, after the tax bill was signed, you said this legislation “recognizes the key role that farms, co-ops and their members play in spurring economic growth across rural America.” How so?

Conner: Once tax dollars from rural America go to Washington, not much of that comes back into those areas. So having this legislation keep more of those dollars out there is very positive, and recognizes the role that farmers and co-ops play in communities and towns across the heartland.

The process of creating this bill was trying and not hugely transparent. In many cases, we couldn’t be sure until the very last minute whether the provisions we wanted would be included. But in the end, this is a law that’s going to make sure there are ample resources for co-ops and our members to invest in rural America. That’s a good thing for this nation’s food-growing economy.

Corporate Tax Rate Since 1965

OUTLOOK: What should co-ops and their members be doing to prepare themselves for the bill this year?

Conner: It’s important to remember that there is a lot of implementation and rule-making still to be done by the Treasury Department and the IRS. That will take a while and everyone needs to be patient. And it will continue to be very important to consult with your tax professionals before making any decisions based on what’s in this law.

OUTLOOK: The new law almost doubles the standard deduction, to $24,000 for couples, while taxpayers who continue to itemize will have the deduction for state and local taxes capped at $10,000? How will those changes affect farmers and ranchers?

Conner: Most of our members will now take the standard deduction-and because it’s larger, that should reduce their personal taxes. But those who live in high-tax states such as New York, California and Connecticut may continue to itemize, and the cap on that deduction could mean that some of them will end up paying more.

OUTLOOK: How will the new 20 percent income deduction for pass-through businesses affect cooperatives and individual farm and ranch owners?

Conner: For those who are organized as S-corporations or as similar entities, it will provide significant tax benefits. Meanwhile, corporations get a 40 percent reduction in their tax rate-and that’s a permanent cut, unlike many temporary provisions in the bill.

Highest Income Tax Bracket Since 1965

OUTLOOK: Which of your members is most likely to benefit from the ability to write off as much as $1 million in capital improvements?

Conner: They all will, in one way or another. That can fund a lot of capital improvements in rural America, where $1 million goes much further than it would in the heart of New York City. Economic growth in rural America typically doesn’t keep pace with growth in the more urban regions of the country. This deduction provides a large incentive for investment, and anything that spurs development can only help us keep up.

Our co-op members that handle commodities could really benefit from being able to make these kinds of investments. With the weather patterns we’ve had, the window for farmers to get their crops harvested just gets smaller and smaller. So they have to move faster and faster. That means the co-op has to invest in new equipment and processes to handle things better and more quickly. The ability to expense those large deductions is critical in serving the interests of our farmer members.

OUTLOOK: Will the doubling of the estate tax exemption, to $22.4 million for couples, help farms stay in the family?

Conner: For years, estate taxes were always the number one issue for farmers. It has been a slow process, with some ups and downs, but over time we have changed that equation dramatically. The exemption for couples under the old law, of more than $11 million, eliminated the estate tax burden for the vast majority of farmers across the country. For the few who still faced that issue, the new changes should essentially take death, as a taxable event, off the table when it comes to agriculture and farming. That has always been the goal. Farmers want to pay their fair share of taxes, but ultimately the fact of passing along a farm from one generation to the next should not produce massive tax consequences. Now it no longer will.

This is a law that's going to make sure there are ample resources for co-ops and our members to invest in rural America. That's a good thing for this nation's food-growing economy.
OUTLOOK: Much of this law, as it involves individuals, families and small businesses, is set to expire in 2025. How does that affect your members and their ability to plan for the future?

Conner: It will have an impact. Agriculture is a long-term investment business. We typically look much further down the road in the co-op world than the investor-owned community. Eight years is still a good long time, but we were disappointed that a lot of the provisions that were important to us are scheduled to end after that-compared with the permanent corporate tax rate reduction, which is less important to co-ops. I wish that wasn’t the case, but we will deal with it accordingly.

I do think that the number of provisions that expire in 2025 is extensive enough that Congress’s hand will be forced and it will have to pass an extension bill. That doesn’t mean everything will get extended, but there will at least be a debate about which provisions need to stay in effect. Once again, as it was in the discussion of this bill, our top priority will be the 199A deduction.

OUTLOOK: At the same time that President Trump was pushing for tax reform, he has talked about reforming or even eliminating the North American Free Trade Agreement. Is that also a concern for your members?

Conner: It’s potentially huge in terms of how any changes in NAFTA might affect immigration. We estimate that more than a million workers on our farms and ranches don’t have proper documentation, and we have been concerned that changes to the law could mean not only that we won’t get new guest workers coming into the country but also that we might lose those workers who are already here-and without those people we absolutely could not continue to feed and provide for America as we now do so well. But in his remarks in early January to the American Farm Bureau, the president said he believes changes to NAFTA won’t hurt agriculture in any way, and that he might even consider providing some kind of legal status for those one million workers. That was good news for us.

If NAFTA negotiations are unsuccessful and lead to American withdrawal from the trade agreement, the consequences for American agriculture would be devastating. Canada and Mexico combined account for just under 30 percent of all US agricultural exports; any loss of market share to competitors outside of North America would mean billions of dollars lost by American farmers and their co-ops.

Also in this issue

  • Interest Rates and Economic Indicators
  • CoBank Announces 2018 Board Officers

Read Outlook