New Jersey’s seafood producing companies that can generally be classified as growers or harvesters(1). The Tax Cuts and Jobs Act offers an opportunity for tax savings to all pass-through businesses, and we expect that many of our seafood producers will qualify for this 20% income exclusion provision.
In addition, the new tax law contains a provision for Section 521 nonprofit agricultural cooperatives(2) that gives and additional tax exclusion for qualified distributions from the cooperative(3). In this case growers qualify but harvesters do not. IRS explains its audit techniques to differentiate the types here. For those that qualify, the cooperative form of organization appears to be financially superior to other business formats.
Many questions remain unanswered about the new law but we expect that some local seafood businesses should adopt a tax planning strategy designed to take advantage of the allowable tax-free business income.
It is reasonable to expect that watermen’s cooperatives or at least grower’s cooperatives might be boosted by the tax law because they can reduce the overall tax rate of growers.
(1) Many local seafood businesses include components of both growing and harvesting. Tax regulations governing these are not yet available but we presume that some form of income allocation will be used to determine the amount of income excluded from tax.
(2) Not all cooperatives are nonprofit organizations and not all nonprofit cooperatives are able to treat all income as non-taxable, therefore some may be subject to income tax. Little information is available from IRS on this provision of the law. It is published here for discussion, not as guidance.
(3) I used this presentation outline as an introduction to the topic: https://www.extension.iastate.edu/agdm/cooperatives/impactoftaxreformonagriculturalcooperatives.pdf