Federal tax loophole to benefit large-scale farms

When it became clear that the new federal tax law would eliminate the domestic production deduction for farmers, lawmakers scrambled to protect farming interests. They settled on a massive deduction for farmers who sell their produce to cooperatives.

One month later, farming organizations across the country have criticized the provision for unfairly favoring one type of business, and legislators are working to create a fix.

“This provision actually gave one business entity a market advantage over others,” said Billy French, owner of French Brothers Dairy in Woodstock. “It’s wrong. It’s wrong that they gave one business type an advantage.”

U.S. Sen. John Hoeven (R-North Dakota), one of the leading voices in pushing for the provision’s inclusion, has since issued a news release saying he and national farming organizations are holding discussions to address “any unforeseen impacts on producers’ marketing decisions.”

Still, French anticipates the impact of the provision will be minimal in the Shenandoah Valley.

The new rule allows farmers to deduct 20 percent of their total sales to cooperatives from their tax return. To capitalize on this, a farm operation needs two essential ingredients: the ability to rapidly pivot from selling to private buyers to selling to a cooperative, and high enough sales for the switch to generate a noticeable effect.

The likelihood of an area farm operation matching these criteria? Not likely, French said.

“In Shenandoah Valley, it’s not going to have a major impact,” he said. “The tax laws for us, just because of the economies of scale, are not large enough for us to make a big difference.”

George Daugharty, owner of Daugharty & Company, P.C., in Woodstock, explained how farmers positioned correctly could take advantage of the 20 percent deduction.

“Let’s say Farmer Brown grows corn, and Farmer Brown grows $1 million worth of corn … and he sells the corn to Rockingham Co-op,” Daugharty said. “At the end of the year, Farmer Brown gets to add up all his other expenses and things he’s got related to his farm, like his fertilizer, and his seed, his equipment, and then in addition, he gets to take this other deduction.”

A 20 percent deduction of $1 million comes to $200,000, which, in Farmer’s Brown case, is more than enough.

“Farmer Brown only made a $50-$60,000 profit, really, but he’s not going to pay any tax now … he’s now at a zero percent taxable income,” Daugharty said. “The bill effectively makes it where farmers are going to have zero taxable income, if they just kind of follow what the bill is wanting them to do, and sell their product to a co-op.”

For French, whose farm has three owners and seven employees, this strategizing doesn’t make sense, logistically.

He gave an example: suppose he loads up his truck with corn and drives down south to sell it to a feed mill. He has several options, including George’s Chicken in New Market, a private buyer, and Valley Poultry Cooperative in Timberville.

“Okay. So I’ve got my choices, and I’ve got it on the truck and I’m pretty much traveling all the same, I might just choose to sell it to the poultry co-op,” French said. “Well, they’re not going to be able to take it all … they’ve pretty much handled all that they could handle before, so they’re not going to be able to take that much more.”

Despite the huge advantage gained by selling to farm cooperatives under the current tax code, actually leveraging that advantage isn’t always possible

“Even if you wanted to, you probably can’t,” French said. “Just the logistics of it’s not going to allow you to.”

The U.S. Department of Agriculture issued a news release Jan. 12 that criticized the tax provision for “disadvantag(ing) the independent operators” in the agricultural industry.

“The federal tax code should not pick winners and losers in the marketplace,” the release stated. “We applaud Congress for acknowledging and moving to correct the disparity, and our expectation is that a solution is forthcoming.”

Chris Carter, communications specialist for the Southern States Cooperation, said the organization hopes to see a reform package come out that replaces this provision.

“There were some unintended impacts of the Section 199a (the cooperative provision) that was passed,” Carter said. “Southern States supports bipartisan farm legislation that benefits all farmers and maximizes farmer’s economic return.”

Carter said Southern States Cooperative supports a fix to the federal tax bill that would eliminate the new provision and re-instate the domestic production activity deduction, which helped protect businesses that produce most of their goods domestically.

The selling-to-cooperative piece of the new tax law isn’t the only provision that helps farmers. Another section doubles the amount of expenses farmers are allowed to write-off at the end of the year, up from $500,000 to $1 million.

French said that, like the cooperative provision, the doubled expense write-off will likely only impact farmers with large-scale operations.

“I don’t know anybody that spends $500,000 now,” French said. “Well that’s a huge number, but we never could get to the little number, so what difference does it make if they make it bigger?”