“Unless Congress takes action to fix it, the new deduction for cooperative dividends could become a lucrative avenue of tax avoidance for people across the country,” said economist Scott Greenberg, a senior analyst at the conservative Tax Foundation.
The strategy could also be used by hedge funds.
“There’s got to be a way for an investment professional to do it,” said Gregory Wilson, a tax lawyer in solo practice and an authority on cooperatives.
One possibility is to form a cooperative consisting of several companies, and keep the investment capital in one of those companies but the profits in the cooperative, he said.
“You could probably do this with most businesses,” Wilson said. “I’m talking to a very profitable law firm interested in doing this.”
Adopting cooperative status could be as simple as changing your bylaws to reflect the three pillars of being a cooperative: control of capital by the owners, who are also called members; giving each owner one vote; and distributing profits to owners.
‘Crazy-Easy to Do’
While the maneuver sounds complicated, “it’s crazy-easy to do,” Fraser said, especially for groups of high-earning doctors, accountants, consultants and lawyers.
Lawmakers have vowed to fix one related quirk in the legislation. That one, known as the “grain glitch,” lets farmers who sell their crops to cooperatives deduct 20 percent of their gross sales. It encourages farmers to bypass corporate buyers like Archer-Daniels-Midland Co. and can erase a farmer’s tax bill. Farmers who sell to a corporate buyer can deduct only 20 percent of their net income and still wind up with a tax bill.
But lawmakers have been silent about the benefit for cooperatives in industries outside farming. And it’s unclear whether the loophole for well-paid professionals could be fixed through a technical correction or instead would require new legislation.