Recent tax discussions have focused on extending some of the provisions of the 2017 Tax Cuts and Jobs Act (TCJA), which were set to expire in 2025. One of the lesser-known provisions that impact agricultural producers is the Section 199A deduction. As in all tax provisions, the details are quite complex, but a layman’s explanation can give a flavor of the key provisions. The history of the provision dates to 2004 when Congress passed the domestic production activities deduction (DPAD) which provided a deduction to companies that manufactured inside the U.S. Farming was included in the definition of manufacturing, so agricultural producers qualified, but there was also a W-2 wage requirement that limited the value to many commodity producers. Agricultural cooperatives were also included, and they could elect to reflect the farmer’s production and associated tax deduction at the cooperative level.
The DPAD was eliminated by the 2017 tax bill in exchange for the reduction of the corporate tax rates. Because over 98% of producers are operating pass-through taxation entities, few farmers benefited from the decrease in the corporate tax rates. Agricultural cooperatives also did not benefit from the tax rate decrease since they typically pass on profits and the taxation of those profits on to their members through patronage. In order to create parity for those groups the TCJA created the Section 199A qualified business income deduction.
As a simplification, Section 199A provides a deduction equal to 20% of qualified income, which is roughly equivalent to taxable income. That deduction lowers the effective rate on pass-through taxation entities such as sole proprietorships, partnerships and limited liability companies to be more on par with the corporate tax rate. The deduction is limited to 50% of W-2 wages paid since the original intent of the DPAD legislation was to encourage manufacturing and employment in the U.S.
The cooperative provisions of Section 199A are somewhat complex. The cooperative calculates the deduction based on their qualified income and it is limited to 50% of the cooperative’s W-2 wages. In the case of cooperatives, qualified business income is calculated before patronage distribution, which is analogous to before tax income in a corporate firm. The cooperative can either retain the deduction at the cooperative level or pass a portion or all of it on to the producer. Because of that pass-through possibility, producers who market commodities through a cooperative have their farm-level Section 199A deduction reduced. Unfortunately (in terms of complication) the cooperative member’s offset is based on formulas relating to the farm qualified income and W-2 wages and is not related to the amount of deduction (if any) passed on by the cooperative.
Because of that structure, cooperative boards of directors face complicated decisions on the amount of the cooperative level Section 199A deduction that is retained or passed on. Those boards must consider both the loss of deduction that the member received from marketing through the cooperative and the value of the deduction to both the cooperative firm and cooperative member.The Section 199A deduction has been an important tool in creating tax parity between corporations, farm businesses and agricultural cooperatives. As with many tax provisions it is perhaps unnecessarily complex. It has positively benefited both producers and agricultural cooperatives which typically did not benefit from the corporate tax rate reduction. It has also created a new, and somewhat complex, role for agricultural cooperatives in pooling and distributing tax deductions. If Section 199A becomes and remains a permanent feature of the tax code, that tax deduction management may come to be viewed as just another aspect of the traditional roles of agricultural cooperatives. I wonder if the Rochdale Pioneers envisioned that role when they developed the original cooperative principles in 1844?
Kenkel, Phil. “Understanding the Section 199A Tax Deduction.” Southern Ag Today 5(23.5). June 6, 2025. Permalink
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