The IRS released today the proposed regulations under Section 199A on the patron deduction and the Section 199A calculations for cooperatives. This blog post will outline the major points from our first reading of the proposed regulations. This post will be primarily related to the affect on patrons, not the cooperatives.
- The patron will be able to allocate qualified business income (QBI) between patronage and non-patronage income using any reasonable method. For example, the regulations provide that a patron could allocate expenses including W-2 wages using the number of bushels sold during the year. However, once you elect a reasonable method, you are required to use that each year.
- There is a safe harbor method available for the patron that allows them to allocate expenses and W-2 wages based upon the gross receipts for patronage and non-patronage income. However, this safe-harbor method is only available if the patron is under the taxable income threshold amount.
- The example shown only shows gross receipts for sales of grain. It does not include gross receipts from the sale of farm equipment which can be a large number. The presumption is that you will include the sale of farm equipment in this calculation, however, will you be required to allocate gross receipts from the sale of farm equipment between patronage and non-patronage income since the depreciation deductions in prior years were also allocated between patronage and non-patronage income. The safe harbor provisions are silent on this. Likely this will need to be addressed by final regulations (or other guidance).
- The first example in the proposed regulations appears to either have some math errors or needs further explanation of how they arrived at their cost allocations (and even if they do that, the allocation of W-2 wage expense does not tie to total expense allocation). We will be commenting on this to Treasury during the comment period.
- Finally, cooperatives will be required to provide additional information to patrons. This information will either be part of Form 1099-PATR or additional notification from the cooperative. If this information is not provided by the due-date of Form 1099-PATR, then the presumption by the IRS is that none of this income will qualify as QBI. This will put an onus on cooperatives to provide timely information to their patrons. If they do not, the cost to both the patron and the cooperative can be extreme.
We will cover the proposed regulations in more detail in our webinar(s) next week. We are providing an hour of CPE for CPAs and an hour that is more general for farmers and others. Here is a link from our original post on these webinars for a link to sign up.