The Internal Revenue Code Section 199A(g) deduction, with its scheduled expiration at the end of 2025, creates tax planning opportunities for agricultural cooperatives to take advantage of the tax benefits of this deduction. The §199A(g) deduction for agricultural cooperatives was created as part of the Consolidated Appropriations Act of 2018 to replace the domestic production activities deduction that was permanently repealed as part of the Tax Cuts and Jobs Act of 2017. The §199A(g) deduction provides a deduction equal to 9% of the lesser of taxable income or qualified production activities income for agricultural cooperatives. The deduction is further limited to 50% of W-2 wages. As taxable income for the calculation of the §199A(g) deduction is calculated before deductions for patronage dividends, per-unit retained allocations, and nonpatronage distributions, the ultimate §199A(g) deduction is often 50% of W-2 wages.
In addition, the deduction the cooperative is allowed to take is limited to overall taxable income as the §199A(g) deduction cannot create or increase a net operating loss. To make the best use of the deduction, cooperatives can elect to pass out a portion of the deduction to patrons; however, patrons may be subject to further limitations on their ability to utilize the deduction. Cooperative members taxed as C corporations or members who have a taxable loss for the year are unable to utilize the deduction; thus, the §199A(g) deduction can be utilized at the cooperative level to reduce taxable income before passing any excess deduction out to patrons.
With the scheduled expiration of §199A(g) for tax years beginning on or after January 1, 2026, agricultural cooperatives have an opportunity to reset the tax attributes of their tax deferrals to be prepared for either the continuance or expiration of §199A(g). Cooperatives can elect to defer deductions they might otherwise take to a future tax year when tax rates are higher or when deductions such as the §199A(g) deduction are unavailable to reduce taxable income. By deferring deductions, the cooperative will be able to utilize more of the §199A(g) deduction at the cooperative level now while also saving other deductions for a future tax year. This action can help to reduce a deferred tax liability a cooperative is waiting to reverse or build a deferred tax asset to utilize for future high tax years.
Potential actions to take to reset the deferred tax attributes include:
- Elect out of bonus depreciation for current-year asset additions
- Reduce level of qualified prepaid expenses at year-end
- Fail test to deduct accrued bonuses in the year accrued so they can be deducted for tax purposes in the year paid
Analyzing these potential actions and how they best interact with the strategy of the cooperative is important to balance value for member-owners while also fully utilizing the tax benefits and deductions at the most advantageous time.
As we near the upcoming expiration of §199A(g) at the end of 2025, agricultural cooperatives and their member-owners stand to lose a major tax deduction. Cooperatives will be faced with significantly higher tax liabilities or larger patronage distributions that will reduce cash flow that otherwise would be available to fund future growth. By taking steps now to prepare for the expiration of §199A(g), cooperatives can be in a better position to handle the upcoming challenges of an increased tax liability.
In the event §199A(g) is extended to future years, the tax benefits of the proposed actions noted above can still be realized. While there is a cost to deferring a deduction, the advantages of being prepared for the termination of §199A(g) may outweigh the costs by putting additional tools and tax strategies in the hands of the cooperative.
In summary, §199A(g) is a beneficial deduction that agricultural cooperatives can currently use to help reduce taxable income. While this deduction is set to expire at the end of 2025, cooperatives can implement strategies to reset their deferred tax positions to be better prepared for the expiration of the §199A(g) deduction.
If you have any questions about planning for the expiration of the §199A(g) deduction, obtaining its benefits before it expires, or want to evaluate your deferred tax attributes, please reach out to a professional at Forvis Mazars or submit the Contact Us form below.