Article Posted on 03/11/2019
The new tax law is unbelievably complicated especially for farm returns. Not only did then not issue some of the rules until January of this year, we have to be concerned that if you sold to the coop what the coop’s year end was and then also if you sold to the coop before or after the coop’s year end. In addition, farmers who sell their farm commodity to a cooperative have a “potential” adjustment to the final Section 199A 20% deduction. This adjustment is the lesser of:
- 9% of QBI related to cooperative receipts, or
- 50% of wages related to this same income.
However, the interesting quirk is when a farmer has other businesses that produces losses. The regulations indicate that these losses are netted against positive QBI (qualified business income) on a pro-rata basis. If we are not careful in how we calculate QBI subject to the 9% adjustment, we can actually end of with a “negative” QBI deduction which is not allowed. Therefore, it is important that you adjust “cooperative” QBI to a net number before you perform the 9% calculation. Let’s look at an example:
Tom has a Schedule F farm that nets $150,000 during the year all from cooperative receipts. 9% of this number is $13,500 (this is 9% based on “gross” and 50% of wages is much higher). He also has a Schedule C business that loses $100,000 during the year. Net QBI is $50,000 ($150,000 farm gain less $100,000 non-farm loss). Our gross Section 199A deduction is $10,000 (20% times $50,000). If we subtract $13,500 from this number we get a negative $3,500 QBI deduction. However, the appropriate method is to reduce cooperative farm QBI to $50,000 (after the $100,000 loss is allocated to it) and then multiply by 9%. This equals $4,500, therefore, the final QBI deduction is $5,500 (plus any DPAD from the cooperative).
We are fairly certain this is the correct way to calculate this, but as usual we have absolutely no guidance on this from the IRS. If we get some guidance, we will provide an update.
If you made it through that entire calculation you can see why it is taking longer to process tax returns this year.