The New Role of Agricultural Cooperatives in Pooling and Distributing Tax Deductions

U.S. agricultural cooperatives create unique benefits for their producer members (USDA- RBCS, 1990). Cooperatives create economies of scale and scope in procuring inputs and marketing and processing commodities (Sexton 1990). Those scale economies also help to provide access to markets. Cooperatives provide an unseen and often unappreciated benefit in offsetting market power and maintaining the competitive environment. Agricultural cooperatives are unique in that they are an extension of the farm or ranch. Producer members can benefit at the farm level through prices and availability of services or at the cooperative level through patronage refunds. When many agricultural cooperatives first formed, they were able to pass along volume discounts for buying inputs at greater bargaining power or pass along volume premiums through greater negotiating ability. Over time, Congress passed various laws and the Internal Revenue Service codified cooperative taxation principles (Frederick 2013). Beginning in 2004, a new member benefit emerged from Congress, which was revised in the tax reform legislation of 2018 and again in 2019. Agricultural marketing cooperatives have been able to receive a federal income tax deduction and can retain that deduction at the cooperative level or pass some or all of the deduction on to their producer members.