199A Coop Deduction – What Do I Do Now?
In January, we posted about the 199A Deduction Impact on Cooperatives which was announced with the new Tax Reform Bill. It left many wondering “what do we do now?”.
Most of the discussion surrounding this new 199A tax law focuses on explaining the effect and how the deduction works. Once you understand the tax effect on coop suppliers, what’s next? Do non-coop purchasers form coops or do they wait and see if this gets “fixed?” This has been a sudden and important change that affects many business. We often get caught up in the discussion and trying to figure out if Congress is going to change this or not, when we should instead be focusing on gathering the facts, identifying the risks and setting our criteria for action.
Many of those impacted are treating this change as if they’re watching the stock market minute by minute and are caught up in the movement of whether this will change or not. However they are forgetting that the goal, similar to investing in the stock market, is to maximize the return while taking measured risks. This risk/return balance is different for everyone.
How Do I Limit My Risk?
Gathering the facts (in this case) includes, talking with your attorney, your accountant and your state grain examiner. All of these professionals will provide the knowledge necessary to understand what it takes to form a new coop. You can also talk with your local coops and find out what it would cost for them to be procurement agents. Communicate with suppliers to find out their willingness to deliver and why they deliver to you versus other options in the first place.
The next step would be identifying the risks. This must be done carefully and cautiously as running through different “what if” scenarios is one of the best ways to identify and reduce risk.
You should then take these scenarios and rank them by their potential to significantly affect your business and then by probability. Most will do this by probability alone however, the potential to significantly affect your business with low probability is still pretty important to understand.
Finally, you must set your action criteria. This last one is traditionally what most have stated as a decision point. “If Congress doesn’t change by March 23rd, then we will act.” This might sound good, but if everyone has the same thing in mind, the line to form a coop will be long. And yes, this is a risk that should not be ignored. So gather information, identify risks and set your action criteria.
We will keep everyone up-to-speed as we learn more about the 199A Deduction. To learn more about how the deduction is calculated, you can click here. If you have questions, please don’t hesitate to reach out to one of our experts!