DPAD Updates – Robert Bell, CPA, Auditor
Iowa DPAD Deduction
The Tax Cuts and Jobs Act 2017 (TCJA) removed section 199 from the Internal Revenue Code (IRC), which created several unintended consequences. In response, Congress introduced Section §199A(g), which essentially re-instated the federal Domestic Production Activities Deduction (DPAD) deduction. As a result, the State of Iowa announced Tax Reform Guidance regarding the DPAD which stated that the DPAD would be available on Iowa returns for the 2018 tax year only and would not be available for subsequent tax years; the State of Iowa did not conform to the new IRC Section §199A(g). Over the course of the past year, we have seen many Iowa cooperatives adding back their federal DPAD when estimating their 2019 Iowa tax liabilities, which is consistent with non-conformity to the federal §199A(g) and created large taxable addbacks to income on state taxes. The State of Iowa has since clarified that the starting point for calculating state taxable income includes 100% of a qualifying cooperative’s federal §199A(g). In other words, for Iowa tax purposes, an Iowa based cooperative is allowed a DPAD deduction equal to 100% of the federal §199A(g) deduction claimed.
Proposed Treasury Regulation Section 1.199A-8
Proposed Treasury Regulation Section 1.199A-8 provides that a specified nonexempt cooperative can only use patronage gross receipts and related deductions to calculate its Section §199A(g) deduction. Further, this proposed regulation provides that an exempt specified cooperative must calculate separate §199A(g) deductions for patronage activity and another regarding non-patronage activity. There has been much discussion
regarding these proposed regulations as their intent is to better replicate the former section 199 deduction prior to the Tax Cuts and Jobs Act of 2017; however, this particular proposed regulation will have negative consequences on cooperatives. Not allowing a nonpatronage sourced DPAD deduction will cause an increase in taxable income. This increase in taxable income can potentially be mitigated through the use of net operating loss carryforwards and credit for increasing research activities, but it is apparent that if this proposed regulation becomes law, it will have an adverse impact on cooperatives. This is a topic we have been monitoring very closely and are committed to keeping our client’s informed as this unfolds.