Tax season is upon us and we now need to prepare tax returns for farmers (and other businesses). There were many questions regarding Section 199A in preparing 2018 returns and although we have gotten some answers, many questions remain on calculating the Section 199A deduction (at least based on the emails and phone calls we continue to get).
This post will outline will summarize what we know now. The next post will go over what we don't know on the cooperative QBI allocations.
- Net farm income from a Schedule F is not net Qualified Business Income (QBI). As we have previously discussed, we need to reduce this income by various deductions that show up on the personal return. These deductions include (but may not be limited):
- The farm share of net self-employment (SE) tax deduction,
- The farm share of SE health insurance deduction,
- The farm share of retirement plan contributions (but not IRAs),
- Unreimbursed partnership expenses (UPE) deducted against partnership income,
- Business interest for buying an S corporation or partnership,
- Charitable contributions paid by the business (only according to the Form 8995-A instructions - we disagree), and
- Finally, the DPAD deduction that flows through from the cooperative (based on informal discussion with IRS and the fact that this was a deduction in arriving at electable farm income (EFI) for farm income averaging).
- Remember, you calculate the 20% Section 199A deduction on all farm income including all income received from a cooperative. Once that is calculated, you may then need to reduce part of this deduction by the lesser of:
- 9% of cooperative QBI (allocating income based on revenue is likely the default, but you allocate 100% of the DPAD deduction to cooperative QBI (which is helpful)), or
- 50% of wages allocated to cooperative QBI.
- There continues to be confusion on the cooperative adjustment. The maximum reduction to the overall 20% 199A deduction is only be 9% of cooperative QBI. At a minimum you will still have at least a 20% deduction on all non-cooperative income and at least 11% on cooperative QBI. Many farmers and tax preparers seem to still believe that you get no Section 199A(a) deduction on cooperative QBI - They only receive the DPAD. This is wrong. You get DPAD plus 11%/20% Section 199A deduction (this assumes you are under the threshold or have no wage or UBIA limitation).
- If the farmer is under the threshold and pays no cash wages, the total Section 199A deduction will always be the 20% number plus the DPAD. If the farmer pays cash wages, then a reduction of the 20% QBI deduction may result.
- However, if you are over the threshold, then you likely have to pay cash wages to maximize the Section 199A deduction.
- Also, many believe that if you are over the threshold amount, that no Section 199A deduction is allowed. The deduction is only reduced if you don't have enough wages or UBIA.
- Rental income paid by a Schedule F farmer, S corporation or partnership via common ownership automatically qualifies as QBI. That means all of the income is QBI even if one or more of the owners does not have any ownership in the farm. Their share of the rental income is still QBI.
- Rents paid by a C Corporation MAY still be QBI if is rises to the level of a trade or business. By restructuring the lease to add certain landlord responsibilities for maintenance or converting to a crop-share lease will bring it up to the level of a trade or business and be QBI.
- If the landlord has at least 250 hours of time in managing all of their farmland property including employees and contractors can automatically qualify the income as QBI if so elected.
This should cover most of the major items.