On March 23, 2018 Congress passed an amendment to the new tax law that removed the “Grain Glitch” where private grain elevators were significantly disadvantaged. Using per unit retains, a form of patronage dividends, farmers could deduct 20% from the gross proceeds of their sales to a cooperative grain elevator but not to a privately held grain elevator. The fix was to remove patronage dividends from the new Section 199A that provided the 20% business pass through deduction. Congress simultaneously reinstated the Domestic Production Activities Deductions (DPAD) for agricultural cooperatives. This had been the original intention of the Senators who added patronage dividends to the 20% pass through business deduction in order to help offset the loss of the DPAD which was removed from the tax code with the tax law change.
So where does this leave co-ops?
For most co-op members outside of farmers this has little effect. The 20% pass through business deduction applies at the individual tax level. So only income received by an individual from a business pass through entity will allow an individual to use the 20% deduction.
The rules restricting the 20% pass through business deduction for high income individuals will now apply to patronage dividends. So you will need to run through those limitations if income exceeds $157,500 for single filers or $315,000 for married filing joint filers.
For food co-ops, consumer retail co-ops, housing co-ops, rural electric and many other co-ops their members have the personal use exemption and were not paying tax anyway.
For purchasing co-ops their members are generally LLCs or S-corporations so they have the opportunity for the 20% pass through business deduction once the income passes through that LLC or S-corporation.
Farmers are generally a Schedule F, LLC, or an S-corporation so they get the 20% deduction through those entities.
An independent contractor member of a co-op can use a Schedule C, LLC, or S-corporation to get the 20%.
For worker co-ops there is wording in the revised law that does allow patronage dividends to be included in the new 20% pass through business deduction applied on the recipient’s Form 1040. When further IRS guidance or the new Form 1040 instructions are issued it should be clear that worker co-op members can use this tax break.
