What About the 9% Reduction

Published on: 06:30AM Nov 18, 2019

In yesterday's post we discussed how the new 20% QBI deduction has to be reduced for certain items but forgot to bring in the possible 9% reduction related to cooperative payments.

In our post, we discussed how $200,000 of QBI can turn into $62,730.  If all of this income was related to cooperative payments and the partnership had at least $160,000 of cash wages, Jerry would be required to reduce his QBI deduction.  If there was no reduction for the items discussed, his QBID would be $40,000 less $18,000 (9% of $200,000) plus $35,000 DPAD for a total of $57,000.

After reducing his QBI to $62,730, the 9% reduction only applies to this number.  His tentative 20% deduction is $12,546.  We subtract $5,646 (9% of $62,730) to arrive at net deduction of $6,900 plus $35,000 for a total QBID of $41,900.  

Even though this deduction has been reduced, the benefit of selling to a cooperative in our example is very high.  Without selling to the cooperative, Jerry's total QBID would only be $12,546.  However, it is now increased to $41,900 due to the DPAD from the cooperative.

In some situations, selling to a cooperative does reduce the deduction (especially if there is no DPAD from the coop), however, farmers usually benefit more selling to a processing cooperative and the benefit can be high.

This is especially true for dairy farmers since most of their income is capital gains and the regular 20% QBID gives them no benefit while the DPAD can offset 100% of their taxable income including capital gains.

As you can see the QBI deduction is very complicated and the IRS seems to be making it even more difficult to calculate or get a benefit from it.