New tax law leaves grain elevator in limbo

Katherine Grandstrand
Farm Forum

There have been a lot of what-ifs at Concord Grain since the tax reform package was signed into law late last year.

“We’re just kind of waiting to see what’s going to happen before we determine how it will affect our business or what steps we’ll have to take or anything like that,” said David Fiebiger, general manager of the private grain elevator on the western edge of Aberdeen.

One portion of the reform package — Section 199 — was changed in a way that benefits farmers selling grain to member-owned cooperatives, rather than to private elevators. Those who sell to co-ops can deduct 20 percent of their sales from their income. Those who sell to private elevators can deduct 20 percent of their profits only.

That difference is considerable.

“Unintended consequences of Section 199A give the farmer incentive to sell to a co-op versus a nonco-op,” Fiebiger said. “Over the past couple weeks, a lot of the people that sit at the table have realized the unintended consequences and have been in agreement that something needs to happen to change that to get the playing field back to even.”

Sen. John Thune, R-S.D., along with his neighbor to the north, Sen. John Hoeven, R-N.D., and other senators have been working to tweak the new law and even things out, Ryan Wrasse, a spokesman for Thune, wrote in a email.

“Ultimately, Sen. Thune believes that producers should make decisions about where and how to sell their products without the tax code unfairly tipping the scales in favor of marketing to one type of business entity or another,” Wrasse wrote.

Concord Grain has fielded some questions from farmers already, even though it’s not a peak buying time, Fiebiger said.

“It’s good that the farmer knows about the change to the tax code and how it affects him, so we’ve had some questions. Unfortunately, we haven’t had a lot of answers we can give because there’s so much out there,” he said. “We haven’t had any interpretation or any definition by the (Internal Revenue Service). The whole thing is in limbo because, (based on) what we’ve heard, a change is coming.”

But because of the turmoil in Washington, D.C., in recent weeks, the difference has not been a front-burner issue, said Doug Sombke, president of the South Dakota Farmers Union. He farms near Conde. The group opposes repealing Section 199A, but supports making minor changes to eliminate the discrepancy.

“They should have never done anything with it in the first place and left it the way it was,” Sombke said. “We’re fearful that our co-ops are going to be left out in the lurch and (Congress will) get rid of everything.”

That would mean no tax benefit to farmers who sell to either cooperatives or private elevators.

Right now, the advantage goes to the co-ops. By deducting 20 percent of total sales, rather than just profit, farmers can show a zero income, meaning they wouldn’t have any taxable income, Sombke said.

“This is a good thing for farmers, this is a good thing for the co-op. Now for the private elevator, probably not, because they feel like they’re going to lose business,” he said.

The change was an oversight when attempting to streamline the tax code, Wrasse noted.

“In trying to simplify things, they actually made it worse,” Sombke said.

Between other issues facing Congress and the 60 votes needed to make a change, Sombke said it will take a big push from ag states to alter Section 199A.

“Right now, we’re having a hard time even getting Congress to consider a farm bill,” he said. “We are such a small group as far as America goes anymore. Agriculture’s a huge economic engine, but when it comes to the actual numbers that vote, we are so small.”

If the tax law doesn’t change, private grain elevators might want to look at changing to a co-op model, Sombke said.

And that may be an eventual reality for Concord Grain, Fiebiger said. It’s one of many “what happens ifs” facing the industry.

“Like any business, we would try and have to find a way to adapt and to change,” Fiebiger said. “What that is, I can’t tell you at this point.”

Follow @kgrandstrandAAN on Twitter.