Blogging Beyond the Numbers

Patronage Dividends under the New Tax Law
Posted by: Bruce Mayer 2 months ago

On March 23, 2018 Congress passed an amendment to the new tax law that removed patronage dividends from being eligible for the 20% business pass through deduction.

This was done to alleviate an issue they called 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 completely 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 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.

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.  An independent contractor member of co-op can use a Schedule C, LLC, or S-corporation to get the 20%.  The primary co-op group losing out in this change is Subchapter T worker co-ops.  I have added an article on what specific things should be considered by worker co-ops now.


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About the Author

Bruce Mayer

Bruce Mayer, MBA, CPA currently serves as a Partner in the Assurance Department, working primarily on audits and tax returns of cooperatives, nonprofits, employee benefit plans and commercial businesses.  Bruce performs audits of all kinds and provides consulting services on taxation of nonprofits and cooperatives.  Bruce enjoys helping clients solve problems and providing clients advice on accounting and tax strategies that meet their needs.



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