{"id":6810,"date":"2018-05-07T05:46:36","date_gmt":"2018-05-07T12:46:36","guid":{"rendered":"http:\/\/evergreensmallbusiness.com\/?p=6810"},"modified":"2019-03-01T11:36:45","modified_gmt":"2019-03-01T19:36:45","slug":"sec-199a-technical-corrections-fix-grain-glitch","status":"publish","type":"post","link":"https:\/\/evergreensmallbusiness.com\/sec-199a-technical-corrections-fix-grain-glitch\/","title":{"rendered":"Section 199A Technical Corrections Fix Grain Glitch"},"content":{"rendered":"

\"The<\/a><\/span><\/p>\n

On March 22, 2018, the President signed into law the Section 199A technical corrections that fix the grain glitch.<\/span><\/p>\n

The bad news with these Section 199A technical corrections? They complicate an already complicated chunk of the new tax law.<\/p>\n

But there’s good news, too…<\/p>\n

If you understand how Section 199A works and how the old Sec. 199 deduction worked, you will find both the Section 199A technical corrections and the actual “fix” easy to understand and learn.<\/p>\n

Section 199A Technical Corrections Fix<\/h1>\n

The grain glitch fix Congress came up with? First, the new version of the Section 199A deduction for cooperative members retroactively removes the 20% of gross \u201cqualified cooperatives\u201d dividends deduction.<\/span><\/p>\n

Note:<\/strong> In essence, the “20% of gross dividends” deduction<\/span>\u00a0gave some farmers and ranchers a tax deduction equal to 20% of their revenues. Absurdly, that gigantic deduction meant these businesses probably wouldn’t pay federal income taxes.<\/p>\n

Second, the new version (essentially) reinstates the old Section 199 deduction (that <\/span>old<\/span><\/i> 9% \u201cDomestic Production Activities Income\u201d deduction) for specified agricultural and horticultural cooperatives.<\/span><\/p>\n

A third and final change: because that 9% deduction gets passed through from the cooperative to the unincorporated and S corporation patrons of the cooperative<\/span>, the new law subtracts a chunk of the cooperative member\u2019s Sec. 199A deduction. That subtracted chunk equals 9% of the qualified business income from the cooperative.<\/span><\/p>\n

Grain Glitch Fix Example<\/h1>\n

A quick simplified example (from our Maximizing Sec. 199A Deductions monograph<\/a>) shows how the new \u201cGrain Glitch fix\u201d works.<\/span><\/p>\n

Suppose a rancher, Roosevelt, sells agricultural products through a specified cooperative, receiving in the process $500,000 in patronage dividend and per-unit retain allocation payments. To produce the agricultural products, Roosevelt spends $400,000 \u00a0on ranch operations (half in wages and half in other operating expenses.)<\/span><\/p>\n

Assuming in this case that W-2 wages don\u2019t limit any of the Sec. 199A deduction amounts (they will in practice probably), Roosevelt calculates his Sec. 199A deduction as equal to 20% of the $100,000 of profits (or $20,000)… plus essentially 9% of the $500,000 in patronage dividends and per-unit retain allocation payments (or $45,000)… minus 9% of the $100,000 in qualified business income he earns from the cooperative ($9,000).<\/span><\/p>\n

Roosevelt\u2019s Sec. 199A deduction in this simplified situation equals $56,000:<\/span><\/p>\n

$20,000+$45,000-$9,000=$56,000<\/h4>\n

Once one understands this basic logic, the other details of the new Sec. 199A deduction for cooperatives and their members become pretty easy to absorb.<\/span><\/p>\n

Section 199A Deduction for Specified Cooperatives<\/h1>\n

For the specified agricultural or horticultural cooperative, the new Section 199A deduction works nearly identically to old the Sec. 199 deduction. (It may even work identically.)<\/span><\/p>\n

To be precise, specified agricultural and horticultural cooperatives get a deduction equal to 9% of the lesser of their qualified production activities income or their taxable income (before taking into account the Section 199A deduction.)<\/span><\/p>\n

As with the old Sec. 199 deduction, the 9% deduction can\u2019t exceed 50% of the taxpayer\u2019s W-2 wages.<\/span><\/p>\n

Also, the Section 199A formula for cooperatives doesn\u2019t deduct patronage dividends, per-unit retain allocations, and nonpatronage distributions to get the taxable income amount that plugs into the Section 199A deduction.<\/span><\/p>\n

Example Cooperative Section 199A Deduction<\/h1>\n

For example, suppose that\u00a0<\/span>Truman Valley Farmers Cooperative, a specified agricultural cooperative, receives and sells $11,000,000 of agricultural products for its patrons each year. Operating costs include $500,000 of W-2 wages and another $500,000 of additional operating expenses.<\/span><\/p>\n

Before deductions for the Section 199A deduction or the Section 1382 payments to farmers and ranchers (the \u201cper-unit retain allocations,\u201d \u201cpatronage dividends\u201d and \u201cnonpatronage distributions\u201d payments), both the domestic production income and the taxable income equal $10,000,000. <\/span><\/p>\n

The cooperative\u2019s Section 199A deduction in this case equals the lesser of three amounts: 9% of the $10,000,000 of domestic production income (or $900,000), 9% of the $10,000,000 of taxable income (again $900,000), or 50% of the $500,000 of W-2 wages (or $250,000)<\/span><\/p>\n

In this case, the cooperative\u2019s Section. 199A deduction equals $250,000.<\/span><\/p>\n

Cooperative’s Passed-thru Section 199A Deduction<\/h1>\n

The cooperative patrons receive a pro rata share of the cooperative’s deduction–a $250,000 deduction in this blog post’s example.<\/span><\/p>\n

A patron with a five percent share of the cooperative\u2019s sales, for example, receives potentially a $12,500 Section 199A deduction.<\/span><\/p>\n

The bookkeeping for the cooperative\u2019s Section 199A deduction works just like the old Sec. 199 deduction bookkeeping. Congress literally copied the statutory language from the old Sec. 199(c) paragraphs for the new Sec. 199A(g) paragraphs. In a nutshell, you subtract cost of goods sold and expenses from the domestic production gross receipts and use common-sense allocations of costs.<\/span><\/p>\n

A related note: Nearly all of the other old \u201c9% Sec. 199 deduction\u201d rules seem to apply to the new 9% Section 199A deduction for specified agricultural and horticultural cooperatives including the expanded affiliate group rules, the unrelated business taxable income rules, a special rule for a cooperative with oil related qualified production activities income, and so forth. <\/span><\/p>\n

Within the Section 199A statute, Congress also instructs the Treasury to base the new Section 199A(g) regulations on the equivalent old Section 199 regulations.<\/span><\/p>\n

Section 199A Deduction for Patrons<\/h1>\n

As discussed earlier, the cooperative patron\u2014for example, a farmer or rancher operating as a pass-thru entity and selling through the specified cooperative\u2014combines three amounts to come up with the final Section 199A deduction:<\/span><\/p>\n