Back in January, the IRS released final regulations on Section 199A. Due to several flaws, the agency continued to work on the verbiage and mechanics.
On April 19, the IRS released additional information on 199A and farm income averaging which was met with confusion. Shortly after the release, the IRS backtracked and clarified how 199A should work if you use farm income averaging.
On June 18, the Treasury released additional guidance for Section 199A that deals with patrons selling commodities to cooperatives and how Specified Cooperatives should calculate and pass through the 199A(g) deduction. Confused? Here are some takeaways from the recently proposed regulations:
1. The proposed regulations reiterate that the qualified business income (QBI) deduction is NOT available to C corporations.
2. Reasonable method is based on facts and circumstances. Patrons of a cooperative can use any reasonable method to allocated QBI between patronage and non-patronage. The proposed regulations reference number of bushels sold as one example. Be aware, once you elect a reasonable method you are required to use it going forward. So give the method some thought!
3. If the farmer is under the taxable income threshold (for the 2019 tax year, $160,700 for single and $321,400 for married), the proposed regulations provide for a safe harbor method. The patron can allocate expenses and wages to patronage and nonpatronage income based off gross receipts.
4. More reporting is needed from cooperatives. Cooperatives must provide the patrons additional information about the distribution by the due date of Form 1099-PATR in order for income to qualify for QBI. The information includes qualified items of income, gain, deduction and loss. If the information is not received by the due date of the 1099-PATR, the amount of distribution that may be included in the patrons QBI is presumed zero!
CONSULT A PROFESSIONAL
The proposed regulations are very technical. Even for tax professionals, they are a bit confusing. With all the recent changes to tax laws (199A, net operating losses and business interest limitations), I caution you to seek qualified professional help in understanding your tax situation. With the aggregations and method elections that are required, one mistake may have a long-term impact on your farm taxes.
I’d also like to point out that in addition to 199A, there are several things to watch in the coming months.
> Agriculture Risk Coverage/Price Loss Coverage sign-up is in September. Make sure you are electing the correct program.
> Information on the second round of tariff payments should be coming out shortly.
Tax Columnist Rod Mauszycki, J.D., MBT, is a tax principal with CLA (CliftonLarsonAllen) in Minneapolis, Minnesota.
> Read Rod’s “Ask the Taxman” column at about.dtnpf.com/tax.
> You may email Rod at firstname.lastname@example.org.
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