Transition rule regarding DPAD and QBI calculations

Transition rule regarding DPAD and QBI calculations for producers with sales to cooperatives

The Consolidated Appropriations Act includes a transition rule for farmers who receive a cooperative payment in 2018 that is attributable to QPAI (qualified production activities income) for which the old DPAD (domestic production activities deduction) deduction was applicable.

• This will include any QPAI attributable to a cooperative tax year beginning before 2018. See Section 101(c)(2).

With the original DPAD gone in 2018, taxpayers were left to wonder how to report such DPAD allocations.

• The law clarifies that such farmers will still be able to take the old DPAD deduction in 2018, as long as it is attributable to QPAI which was allowed to the cooperative for a tax year beginning before 2018.

• No 199A deduction will be allowed for such payments [Appropriations Act Sec. 101(c)(2) Division T].

Impact to farmers

Most cooperatives operate under a fiscal year.

• The transition rule will affect farmers that did business with a cooperative with a tax year that started before 12/31/17 (which will be true in most cases).

• Cooperatives with a tax year beginning before 12/31/17 will still be able to calculate and potentially distribute a DPAD to the cooperative patrons.

• If the farmer receives a DPAD passed through from the cooperative, the farmer will be able to use the DPAD on his or her 2018 income tax return.

The transitional rule excludes from the 199A QBI calculation any sales from the farmer that falls within the co-op’s fiscal year.

• It does not matter whether the cooperative passed the DPAD through to the patrons or retained the DPAD at the cooperative level.

• All farm sales that occurred during the cooperative’s fiscal year will NOT be eligible income for the QBI deduction on the farmer’s 2018 individual return.

Transition rule regarding DPAD and QBI calculations for 2018 - example

Farmer Jones sells corn and soybeans to ABC Cooperative.

• ABC Cooperative has a fiscal year that began August 1, 2017, and ended July 31, 2018. Fiscal years will vary by the cooperative.

• Since ABC Cooperative’s fiscal year started before 12/31/17, ABC will be able to calculate and potentially distribute a DPAD credit to its patrons.

• A pass-through DPAD credit will be reported on Form 1099-PATR and the aforementioned DPAD credit will be reported on Farmer Jones’ 2018 individual income tax return.

• Farmer Jones must exclude farm sales made to ABC Cooperative that occurred between January 1 and July 31 (the end of the co-op's fiscal year) from the QBI calculation.

• The only co-op sales that Farmer Jones will be able to use for the 2018 QBI calculation will be sales that occurred after July 31.

• Sales that occurred during the fiscal year of the cooperative that was eligible for DPAD at the cooperative level do not qualify as QBI income.

• It does not matter whether ABC retained or distributed the DPAD credit.

Note: This information piece is offered as educational information only and is not intended to be tax, legal or financial advice. For questions specific to your farm business or individual situation, consult with your tax preparer.