In recent months, a flurry of news articles have pointed to a strategy whereby certain highly paid professionals (such a doctors, lawyers, and accountants) can form worker-owned cooperatives in order to avoid the limits placed on the new tax law’s 20% deduction for owners of small businesses/pass through entities.

Essentially, the 20% deduction phased out under the new tax law if these professionals made too much money (starting at $157,500, or $315,000 for joint filers), but this phase out did not apply in the case of a cooperative (commonly referred to as the “grain glitch” because it resulted from a feature designed to protect farm cooperatives). For a brief period of time, commentators were speculating that professionals would use this loophole to reorganize into cooperatives and save taxes.

However, this “glitch” was “fixed” in the omnibus spending bill signed into law on March 23, 2018. The omnibus spending bill removed the general ability to use “qualified cooperative dividends” in the 20% deduction, and moved these provisions into a new section that only helps “specified agricultural or horticultural cooperatives.” See Omnibus Bill, Sec 101(b)(1), pp. 2045-46. In short, the cooperative loophole is no longer available for professionals.

This is a good example of why it pays to “wait and see” when it comes to new tax loopholes.

If you have additional questions about the “grain glitch” or how to take advantage of the new tax law, please contact Luke Campbell at lcampbell@mpba.com or 206-682-7090. Luke Campbell has extensive experience representing businesses in a variety of complex matters.