DPAD Could Create Negative QBI

Published on: 07:11AM Nov 19, 2019

We had a reader ask about the DPAD deduction against Qualified Business Income (QBI).  They could not find this detail in the draft instructions for new form 8995-A.  The reason is that the IRS communicated this directly at the AICPA Tax Committee meeting last week and the instructions have not yet been updated for this new detail

What happens if the DPAD deduction is greater than QBI.  Will this create negative QBI that has to be carried forward to the following year and put the farmer in the hole to start.  The answer is "It Depends".  Let's look at some examples.

Jerry is a dairy farmer.  He earns a net of $300,000 from the farm and has a DPAD from his cooperative of $300,000.  His QBI is $300,000 minus $300,000 equals zero.  He is allowed to deduct his DPAD against taxable income including capital gains.

Now, let's assume that he nets $150,000 from farming and this is also his taxable income before any QBI deduction.  His QBI could be negative $150,000, however, his DPAD deduction is limited to $150,000 which reduces his QBI to zero.  Our assumption is that QBI is only reduced by the amount of DPAD allowed to be deducted on the return.

Now, let's assume the same facts, but taxable income is $500,000 due to a fair amount of Section 1231 gains from selling raised breeding stock.  In this case, the DPAD is allowed in full, thus QBI is now a negative $150,000 ($150,000 minus $300,000).

As you can see, the DPAD from the cooperative has great value, however, it can in some situations create negative QBI.