After yesterday's post, we received a couple of emails on Form 1099-PATR and how to report certain items on the form. This post will go over those items.
First, for Form 1065 and 1120-S, the DPAD reported in Box 6 will be a separately reported item on Schedule k-1. There is no QBI form for partnership and S corporation returns. Instead, you are required to report all items related to QBI on a statement attached to Schedule k-1 including the DPAD from the cooperative. You may also want to state which cooperative provided the DPAD since the individual Form 8995-A does request inputting the name of the cooperative.
For a Schedule F farmer, the Box 6 DPAD is reported directly on line 38 of Part IV on page 2 of Form 8995-A. This is based on the draft form released by the IRS on November 14, 2019. As we have previously stated a few times, it may be difficult to prepare farmer's tax returns by March 1 if the IRS does not finalize these forms soon.
We discussed how Box 7 numbers were calculated in yesterday's post. However, some appear to be confused on what to do with this number. This is not the number that we multiply by 9% and it is not the number we reduce QBI by. Rather, this is the number that we use as the numerator in calculating the amount of cooperative QBI. For example, assume Box 7 is $1 million and Box 6 is $50,000. All other farm payments is $2 million. Total farm QBI is $300,000 and wages are $40,000.
The Section 199A(a) 20% tentative deduction is $60,000. $1 million divided by $3 million of total payments is 33.33%. This times $300,000 is $100,000. However, the $50,000 listed in Box 6 has already reduced QBI, therefore, we need to add it back to arrive at gross QBI of $350,000. This times 33.33% is $116,666. We then subtract the DPAD of $50,000 to arrive at cooperative QBI of $66,666. 9% of this number is $6,000. We then compare this to our 50% of wage calculation which is $40,000 times 33.33% times 50% or $6,666. Therefore, we reduce the QBI deduction by $6,000 which is the lesser of the two numbers.
The final Section 199A deduction is $54,000 plus $50,000 of DPAD for a total of $104,000 (this assumes no taxable income or other limitations).
There is still no final instructions stating that the DPAD reduces QBI. Rather, this is based on informal guidance from the IRS and it is likely that final instructions will have this information. Even without this, it does make sense that QBI should be reduced by this deduction since it is directly related to farming income.
Just like last year, our tax software appears to still not have caught up with all of the Section 199A calculations. This may be an internal issue or it may be the IRS still not finalizing the instructions.
We will keep you posted.