National Coops Look To Take Advantage of Section 199
By: Dennis Gardiner, Partner | email
With their letter dated August 19, 2009, AGP announced their intent to take advantage of the enhanced section 199 deduction effective with their current fiscal year ended August 31, 2009. They will now be computing their section 199 deduction in accordance with the prescribed manner that Gardiner Thomsen brought to you last year.
The question is now, how will this affect your cooperative tax return?
The fact is, as we discussed last year, whether or not a cooperative adds PURPIMs back to their taxable income for computing section 199, those PURPIMs are NOT qualifying gross receipts to the member recipient for purposes of the member computing their own section 199. In other words, even if a cooperative does not claim the enhanced deduction, member grain payments are still PURPIMs to those members. This precludes members from considering these as qualifying domestic production gross receipts when making their section 199 calculation.
AGP’s actions will have the effect of reducing a cooperative’s qualifying domestic production gross receipts. However, remember that the section 199 deduction is limited to one-half of your qualifying wages. As we discovered last year, our clients’ section 199 deductions were reduced to this limitation in almost every case. What this means is that a cooperative could reduce its qualifying domestic production gross receipts to the point where the computed deduction equals the 50% of qualifying wage limitation without experiencing a decrease in their section 199 deduction. When one considers that the domestic production activities income percentage is increasing from 6% to 9% next year, a cooperative could reduce its qualifying domestic production gross receipts because of grain sales to other cooperatives of which it is a member, without reducing any section 199 deduction due to the 50% wage limitation. Also, remember that any sales your cooperative makes to a non-cooperative are not affected by this IRS rule.
Furthermore, the AGP letter indicates that they intend to pass “most or all” of their section 199 deduction to their members for their fiscal 2009 year. Because an allocated section 199 deduction is treated differently than a cooperative’s computed section 199 amount (remember, nothing is ever easy with taxes and the IRS), you could very well have a situation where your computed section 199 deduction is not reduced for the reasons discussed above, yet because of your share of AGP’s section 199 allocation, your actual usable section 199 deduction is increased.
You will still be able to deduct your allocation of AGP’s 199 deduction in the tax year that you receive notice. I would imagine that you will receive a letter from AGP announcing your portion of the AGP section 199 allocation. This amount will then be reported on box 6 of your 1099 PATR form that you receive in January for the prior calendar year’s business. If you receive this notice in 2009, then your 2009 1099-PATR will report this figure. If you don’t receive notice until 2010, this allocation will not be reported to you until you receive your 2010 - 1099 PATR in January 2011.
AGP’s letter goes on to say that they may ask the IRS to permit them to change the way they compute their ending inventory. We have previously touched on this issue. As AGP says, this would create a significant one-time cost of goods sold deduction in the year of change. We have analyzed this situation for some of our clients. This significant one-time deduction would most likely create a large operating loss that can be carried forward. Because of how section 199 is deducted, this large loss carry-forward would most likely allow AGP to continue to pass their section 199 deduction through to the members. We are hypothesizing a bit here, but the fact patterns could easily support such an action.
Although we have not seen anything in writing, we have heard rumors that CHS is also considering computing the enhanced 199 deduction. If they do, the same rules discussed above would apply.
The bottom line at Gardiner Thomsen is that we will continue to aggressively monitor and implement where appropriate, IRS rules and rulings in the best interest of our clients. Should you have specific questions or concerns regarding AGP’s letter or would like to discuss the possibility of CHS following suit, please do not hesitate to give us a call.
