Domestic Production Activity Deduction Update

The Internal Revenue Service (IRS) issued final rules regarding the domestic production activities deduction 199A(g) (DPAD) Thursday.

The IRS has made the decision to not allow the DPAD to apply to non-member-based business.

The Office of Information and Regulatory Affairs (OIRA) completed its review of the final regulations under 199A(g) and plan to reveal guidance next week.

The 2017 Tax Cuts and Jobs Act (TCJA) temporarily gave an advantage to farmers who sold their grain to agricultural cooperatives. This has commonly been referred to as the “grain glitch” and was reversed in March of 2018. This stemmed an effort to re-write the cooperative DPAD rules which has led to the latest ruling by the IRS.

In calculating the deduction, cooperatives are required to allocate income between patron sourced and non-patron sourced, further reducing these incomes by patron sourced and non-patron sourced cost of goods sold and other expenses, arriving at qualified production activities income (QPAI).  The deduction is then limited to the lower of 50% of W-2 wages or 9% of QPAI.

Under the old section 199 rules, a cooperative could appropriately allocate the 50% wages or 9% QPAI limitation between patron AND non-patron business, ultimately arriving at their total domestic production activities deduction.

With these new, and final regulations, cooperatives will now only be allowed to apply the deduction to patron sourced income.

Simplified Example:




Member (85%)

Non-Member (15%)

Gross Revenue
























50% Wage Limit












Eligible DPAD





In the example above, the latest rulings will eliminate the “Non-Member” column from this calculation, which for many cooperatives could have very large tax consequences, particularly for those with low member business percentages.

Unfortunately, these final rules have taken away a valuable deduction to the cooperative community. The new final rule is planned to be published on January 19th, which is significant timing because any rules not published by January 20th will be up for review by the new administration.