Form 1099-PATR has been around for many years without too many significant changes. Starting with 2019 we will start to see some changes, specifically the addition of Box 7 - Qualified Payments. This box indicates to the taxpayer the amount of payments that the cooperative used in calculating their Section 199A(g) deduction. This deduction is commonly referred to as the Domestic Production Activities Deduction (DPAD) however should not be confused with the deduction under Section 199.
This sounds fairly straight-forward, however it is not. Box 1 - Patronage Dividends and Box 3 - Per Unit Retains show payments to the farmer on a calendar year basis. The Form is to report actual activity to the recipient for the calendar year. So should Box 7 be on a calendar year even if the cooperative has a fiscal year end or should it be based on the fiscal year of the cooperative? It appears most cooperatives will be reporting these payments on a calendar year basis, however some may be reporting on a fiscal year basis.
So what do we do with Box 7?
The Box 7 amount determines the amount of Qualified Business Income (QBI) that is subject to the potential reduction based on the lesser of:
- 9% of QBI related to Box 7 payments, or
- 50% of wages related to cooperative QBI calculated based on Box 7 payments.
IMPORTANT – It does not matter if the cooperative passes any DPAD to the producer which is reported in Box 6. Even if Box 6 is zero, you are still subject to the above calculation.
How was box 7 determined?
If Box 7 agrees to Box 1 plus Box 3 (and perhaps including Box 5 – Redemptions of Non-Qualified) then the cooperative has likely computed this amount based on a calendar year, consistent with the remaining information reported on Form 1099-PATR.
If Box 7 is materially different than Box 1 plus Box 3, one assumption is that the cooperative has calculated this number based on their fiscal year. In this situation, you should verify with the cooperative that this is based on a fiscal year basis. This number is used in your calculation above. This may require you to compute cooperative QBI based on a fiscal year basis to properly match up revenue and expenses. Some of those payments may have been used in your 2018 patronage adjustment and after reconciliation, an amended tax return may be appropriate.
In some cases, it is likely that Box 7 will be less than Box 1 plus Box 3 and it is not based on a fiscal year. In that case, the cooperative has elected to reduce Box 7 by the amount of qualified payments "not used" in arriving at the DPAD in Box 6 since the DPAD was limited by wages. In this situation, the cooperative is reducing the amount of payments subject to the possible 9% reduction, however, if this number ends up being incorrect, the IRS has the option to indicate that the amount of Qualified Payments not shown in Box 7 do not qualify for QBI. In that case, your reduction is not up to 9% but a full elimination of the 20% deduction on the payments not shown in Box 7.
There still is no real guidance from the IRS on any of these issues. We simply have some instructions with minimal to no guidance and proposed regulations that have not yet been finalized.
Be prepared, this year's QBI may be just as complicated as last year.