Section 199 Deductions and New Tax Credit Information

December 1, 2008 Agribusiness

By: Charles L. Telk Jr., CPA, Senior Tax Advisor | email

As 2008 draws into the home stretch, we at Gardiner Thomsen wanted to review some major new tax and reporting issues with you. There have been several exciting new changes and credits that have recently been enacted and we want to encourage you to take advantage of these benefits. The largest new tax benefit is without a doubt the section 199 deduction. An IRS ruling that allows cooperatives to treat cash payments to members for purchases of grain as a “Per Unit Retain Paid In Money” for purposes of computing the section 199 deduction has exponentially increased this deduction for our cooperative clients. However, there are some reporting issues that we want to make everyone aware of.

SECTION 199

As with most tax related issues, the better the evidence that a taxpayer has, the better the chance that the taxpayer will prevail should the IRS challenge a position or deduction. With this in mind, we suggest that cooperative clients take the following steps to protect this increased section 199 deduction:

On all grain checks that are issued to members, include a notation on the check that “This grain payment is considered to be a Per Unit Retain Paid in Money under section 1382(d) of the internal revenue code.

Notify your members on an annual basis that because the cooperative is considering these payments to be a Per Unit Retain Paid in Money, the patron should not consider the income to the patron as a Qualified Domestic Production Gross Receipt for purposes of computing the section 199 deduction. I would recommend the following letter (or something similar) be sent out to all patrons:

Dear patron of _____ Cooperative, Effective _____(beginning of the tax year), ____Cooperative is considering the grain payments paid to you to be a Per Unit Retain Paid In Money under code section 1382 (d) of the Internal Revenue Code. As such, you should not consider these payments that you have received to be a Qualifying Domestic Production Gross Receipt for purposes of computing your section 199 deduction. Please consult your tax advisor or CPA if you have any questions regarding this issue. Sincerely, ____________ Cooperative

It is clear that you will have to report the total amount of payment considered a Per Unit Retain Paid In Money to your patrons on form 1099-PATR, Box 3. Please note, this will NOT increase taxable income to your patrons as they have been considering these payments as income. It is merely a reporting function. Also, please keep in mind that even if your cooperative has a fiscal year for tax purposes, 1099 forms are reported on a calendar year basis. Per Unit Retains Paid in Money during 2008 will be reported on a 2008 form 1099-PATR that will be due to the members by January 31, 2009.

AGRICULTURE CHEMICALS SECURITY CREDIT

This is a brand new credit that is used to claim a credit for qualified agricultural chemicals security costs that are paid or incurred after May 22, 2008 (and before January 1, 2013). A copy of this new form (Form 8931) and its instructions are enclosed for your review. Please note that there are 8 categories of costs that qualify and that these costs cover a wide variety of security costs. A taxpayer is allowed a 30% credit based on total qualifying security expenditures up to a limit of $100,000 per facility. So, if your cooperative has 8 locations, theoretically you could claim a total credit of $800,000 provided you had sufficient qualifying costs. Please review your general ledger to see if you have any qualifying costs (post May 22, 2008 costs), and inform us as soon as possible so that we may claim this credit on your cooperative 1120-C tax return.

WORK OPPORTUNITY TAX CREDIT

This is something that is not new for 2008. We have previously discussed this credit and provided the details. However, due to the lack of response, I wanted to again mention this. Basically if you hire new employees (defined as a new employee whom has not previously been employed by the cooperative) ages 18 to 39, depending on their county of residence, you may be able to claim this work opportunity tax credit. There are specific documentation requirements that must be met in order to claim this credit but they are relatively mild. If you hire any brand new employees in this age range, it would be prudent to contact us to see if you may qualify for this credit. Remember, a credit reduces your tax on a dollar for dollar basis. If we can be of assistance regarding these or any other issues, please contact us. Thank you for the opportunity to be of service.