IRS Proposed Regulations on Section 199A – Cristina Bucksbaum, Tax Manager

In mid-June the IRS released proposed regulations (156 funfilled pages) providing guidance to cooperatives and their patrons regarding the deduction for qualified business income (QBI) under section 199A(a) of the Code. This guidance also included specified agricultural and horticultural cooperatives (“specified cooperatives”) and their patrons regarding the deduction for domestic production activities under section 199A(g) of the Code.

The provisions of the proposed regulations:
+ Describe rules for patrons of cooperatives to calculate their QBI deduction
+ Set out criteria that cooperatives must satisfy to qualify for the 199A(g) deduction - Setting four steps necessary to calculate the deduction
+ Provide additional rules for determining domestic production gross receipts (DPGR)
+ Provide additional rules for calculating costs applicable to DPGR
+ Provide additional rules for determining the W-2 wage limitation
+ Detail rules for applying section 199A(g) to an expanded affiliated group

One of the four steps referenced in the second bullet is to identify (split) a specified cooperative’s gross receipts and related deductions from patronage and non-patronage sources. It is the intent of the Treasury Department and the IRS, under this proposed regulation, that the 199A(g) deduction be made available only against patronage source income. The subsequent loss of the 199A(g) deduction against non-patronage income and its impact on lowering taxable income is mitigated under an alternate benefit shared by other C corporations under the Tax Cuts and Jobs Act’s reduction of the top tax rate from 35 percent to 21 percent.

These proposed regulations also include, under section 1388, a single definition of patronage and non-patronage, which intends to reflect the current case law under 1388. In addition, the proposed regulations require additional reporting from the cooperative to their patrons.

Bear in mind these are only proposed regulations at this time, and may change to some degree before finalization. Several groups within the cooperative industry are analyzing the proposals. Their initial concerns thus far include: maintaining the ability to use the 199A deduction against non-patronage income; definitions of agricultural activity, services and supplies; maintaining the ability to net patronage and non-patronage income; and onerous reporting requirements. Stay tuned.