We had a reader send in the following comments today:
Last year, if we had an “old” (Sec. 199, no cap “A”) DPAD pass-through from a cooperative, we needed to allocate a portion of farm income to that, reducing the income eligible for the 199A deduction. This also had the effect of reducing the QBI loss carryover to 2019 for those farmers showing a loss.
If we have a farmer that receives a “new” 199A deduction passed through from the coop, there’s the reduction to QBI based upon the lower 50% of cooperative allocable wages or 9% of cooperative allocable income. A couple of us believe if there’s a farm loss in 2019, there is no reduction based on wages or 9% of 50% of wages. Essentially, the farmer is left with his 199A(g) deduction passed through from the coop and anything he/she might generate from another business. He/she’s also got a QBI loss carrying over to 2020 equal to his 2019 farm loss (assuming nothing else is going on).
A colleague strongly believes there’s still a reduction to the current year even if there’s a farm loss or this reduces the loss carried over from 2019 to 2020.
This is a good question and we are not sure if we have the final answer. When you review the instructions for 2018 QBI calculation and look at the new Form 8995-A, you will notice that when you have negative farm QBI that the cooperative portion is reduced by the lesser of 9% of that QBI or 50% of wages. 9% of a negative number is always less than 50% of a positive number (or zero), thus you will reduce it by a negative 9% of QBI. However, when you then carry it forward to the correct part of the form, you are now subtracting a negative number which means you increase QBI, not decrease it. The form does not say if the number is negative enter zero.
This could be correct since the IRS may be indicating that the cooperative 9% adjustment is a cumulative number, therefore, both positive and negative numbers are accumulated together.
Since this is the way the form works and there is no further guidance from the IRS, this is likely the correct method. Here is an example.
Farmer Mary had negative Schedule F income in 2019 of $100,000. All of it was from sales to a cooperative and she paid no wages. 9% is equal to $9,000. If she had no cooperative sales, her QBI loss carryover to 2020 would be $100,000, however, the $9,000 adjustment reduces her loss to $91,000 which is the number carried forward to 2020.
Remember that the DPAD flowing through from the cooperative will also reduce QBI, but the DPAD is allowed in full against any other net taxable income that the farmer may have even though farm income is negative.
In our example above, assume that Mary’s husband Jim had wage income of $200,000 and they received a DPAD of $20,000. The $20,000 DPAD can reduce taxable income from $100,000 to $80,000 (before standard deduction and other items) even though QBI is a negative $91,000 (assuming the $20,000 DPAD has reduced net farm loss to $100,000).
