In March 2018, provisions to Section 199A of the Tax Cuts and Jobs Act (TCJA) were amended to remove the tax incentive to sell grain to a cooperative, and was coined as the “fix to the grain glitch.” These provisions also created a transition rule that could significantly impact a cooperative patron’s 199A deduction.
The provision states when a farmer calculates their 199A deduction in 2018, the farmer cannot include in the calculation of their 199A deduction the grain sold to a cooperative between January 1, 2018 and the cooperative’s fiscal year that ends in 2018 if that cooperative accounted for those sales when calculating their domestic production activities deduction (DPAD) under the old 199 rules.
In the Joint Committee on Taxation’s Bluebook published in December, they provided additional comments about the transition rule, stating that patrons that received qualified payments from cooperatives with fiscal years that begin in 2017 and end in 2018 are subject to this transition rule. For these patrons, the former or old section 199 DPAD can be claimed if the cooperative passed through the DPAD. However, these qualified payments (qualified payments between January 1, 2018 and the cooperative’s fiscal year that ends in 2018) cannot be considered in the calculation of 2018 qualified business income deduction (QBID).
Patrons of cooperatives with a calendar year-end of December 31, 2018 are not subject to the 199A transition rule, as the beginning of the cooperative’s year did not begin in 2017, but rather on January 1, 2018. Patrons of all other cooperatives with fiscal year-ends that begin in 2017 and end in 2018 will be subject to the 199A transition rule, if that cooperative accounted for those sales when calculating their domestic production activities deduction (DPAD) under the old 199 rules.
The transition rule and the timing of grain sales has a significant impact on the amount of Section 199A QBID a farmer can claim on their 2018 return. Kansas State University Professor Brian Briggeman and Kansas Farm Management Association Associate Director Mark Dikeman authored a fact sheet regarding the transition rule and outlines an example showing that depending on when the grain was sold, the QBID deduction could vary vastly from anywhere between $3,000 and $30,000 on the sale of $900,000 in grain.
As farmers and other cooperative patrons begin to prepare their 2018 tax returns, they will need to show their accountants when the grain was sold to the cooperative, which can add another layer of reporting for cooperatives because the 1099 PATR form issued by cooperatives does not state when the grain was sold.
Cooperatives should be prepared to be contacted by their patrons as they will need to know when the cooperative’s fiscal year ends and when their grain was sold.
It is important to note that the transition rule only affects 2018 farm income tax returns, so the timing of grain sales to a cooperative will not impact the QBID calculation for the 2019 tax period and beyond.
Also important to note, while the Joint Committee on Taxation has provided technical explanations, the IRS has not yet issued proposed regulations regarding this transition rule.
The bottom line is that farmers may not get the deduction they were planning on due to the transition rule. Need help navigating this new landscape? Start here.