The IRS released new Proposed 199A Regulations last week. The bottom line is that not much new information was presented to help farmers understand how to calculate the 199A adjustment for cooperative income.
Yes, there was some wording and examples regarding very simple allocations of deductions and W-2 wages, however, many of the key issues we are dealing with were not addressed. These key issues are as follows:
Section 1245 Gains - Tax reform now requires farmers to report the gain on traded-in farm equipment. In many cases, farm income will be negative and all of the income will be from trading-in farm equipment. The question is how do we allocate the 1245 gains. Do we allocate all of it to non-cooperative income, all to cooperative income or some combination based on gross receipts; the amount of depreciation taking in prior years based on cooperative and non-cooperative gross receipts, etc.
Many think that none of these gains should be allocated to cooperative income which would eliminate the issue. However, the depreciation deduction taking on the equipment was likely allocated to cooperative income, thus reducing the effect of the 9% of AGI patron reduction. We need guidance on this.
Governmental payments - How should these payments be allocated? If a farmer sells all of their commodities to a cooperative and receive a governmental payment (i.e. ARC or PLC), should that be treated as cooperative income or not.
Aggregation Election of Rentals - Many farmers over the threshold will have to elect to aggregate their rental income with the farm operation to get the full QBI deduction. Will this then require some allocation of the farm rental income as being part of the 9% AGI reduction. Most would say no, however, once your aggregate the two entities, the rental income reported was deducted on the farm operations entity; therefore, do you have to at least include that amount as part of the reduction calculation. We don't know and the proposed regulations did not address.
Negative 9% Reduction - The instructions for the QBI worksheet for 2018 and the proposed Form 8995-A both appear to indicate that if a farmer has negative QBI related to cooperative payments, then the lower of 9% of AGI or 50% of W-2 wages will always be 9% of negative AGI. Based on the Form, it appears that you now increase your QBI deduction by this amount. The Form does not say if the number is less than zero to enter zero. We can make an argument each way, but the proposed regulations did not address it.
I am sure we may come up with some more items after our webinar this Wednesday, however, I know that we needed guidance on these items and none was forthcoming. We will keep you posted.