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Effect of tax reform’s 199 loss

pabradyphoto/iStock/ThinkStock Tax reform stamped on image of Capitol building
CONFUSION CLEARED: Dropping the corporate tax rate to 21% minimizes the “tax bite” of losing Section 199 benefits.
It’s a wash: Section 199 pass-through benefits are largely retained with its replacement and the corporate rate cut.

While details of the federal Tax Cuts and Jobs Act are still shaking out, loss of the Section 199 (pass-through benefits) will have minimal impact on agriculture. That’s the bottom line.

Section 199 benefits were lost with the tax reform act. But the 20% pass-through deduction of business income was largely restored by its replacement — Section 199A — for noncorporate taxpayers, including cooperatives, S corporations, sole proprietorships, partnerships, and even trusts and estates. This provision expires Dec. 31, 2025. That’s a quick summary from John McKinley, tax law analyst at Cornell University’s College of Business.

While corporations lost the 199 benefits, the corporate tax rate dropped from 35% to 21%, and it’s permanent. “The 35% was noncompetitive on a global scale,” McKinley says. “And 21% was a good fit. Something had to go to pay the bill [federal funding].”

Loss of 199 benefits won’t be a huge issue for agricultural corporations, he says. They don’t use pass-through benefits like cooperatives do. Their tax rates have dropped substantially. And there will be a lot of technical corrections to the law to iron out inequities, just as in 2013.

There’s another caveat: Not all corporations pay wages. As McKinley points out, “Even if you’re a corporate real estate holding company, 50% of W-2 wages is zero.”

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