199A for Cooperative Patrons Generating Many Questions

February 21, 2020 | Kristine Tidgren

With filing season well underway, IRC §199A (Section 199A) has been generating a lot of questions, particularly with respect to patrons of agricultural and horticultural cooperatives. Below we discuss several common issues.

Could a patron of an agricultural cooperative really be entitled to two deductions under section 199A for doing business with the cooperative?

The answer is “yes.” A patron may be entitled to two deductions. In many cases, farmers who did business with a cooperative in 2019 will receive two deductions attributable to the business they did with their cooperative. They may receive a section 199A(a) 20 percent QBI deduction and a section 199A(g) DPAD deduction. Some will have to calculate a reduction to the 199A(a) QBI deduction, but some will not (more on this below). Here is the IRS explanation in a Q & A published last summer:


This novel law was implemented as a fix to the “grain glitch” that was made in March of 2018. To partially offset the benefit of the two potential deductions, the law requires patrons who pay W-2 wages to reduce their standard 20% QBI deduction in an amount up to 9% of their QBI attributable to their cooperative business. This reduction is required, whether or not the cooperative passes through its §199A(g) DPAD deduction to the patron. Patrons who do not pay W-2 wages do not reduce their 199A(a) QBI deduction. They are entitled to their full 20% QBI deduction (if otherwise eligible), plus any §199A(g) DPAD deduction passed through to them by the cooperative.

This distinction among patrons preserves the special tax benefit agricultural cooperatives sometimes provided to farmers who did not pay W-2 wages under §199 (the old DPAD). Under the old law, farmers who did not pay wages were eligible for the (up to) 9% DPAD deduction only if they did patronage business with a cooperative and then only if the cooperative passed the deduction through. This is because all DPAD deductions were limited to 50 percent of W-2 wages paid. The cooperative’s wages were used to calculate the DPAD deduction passed through to patrons, and doing business with a cooperative that passed DPAD through to its patrons gave these farmers a deduction they otherwise would not have received.

Conversely, farmers who paid W-2 wages could claim the 9% DPAD in their own right, in an amount up to 50% of the W-2 wages paid, for business they did with a non-cooperative. For their cooperative business, however, a patron’s eligibility for the DPAD was dependent upon a choice made by the cooperative. The cooperative calculated the DPAD, and the farmer was not allowed the deduction for its cooperative income if the cooperative chose not to pass it through.

Transition Rule

Part of the confusion this year is stemming from the fact that last tax year, many farmers were not eligible for the 199A(a) QBI deduction for income generated through business with the cooperative. This was because of a special transition rule placed into the grain glitch fix. If the farmer did business with the cooperative during the cooperative’s tax year that began in 2017, the cooperative was still eligible for the old DPAD under section 199. Because of that, the law stated that farmers could take this old DPAD passed through to the farmer in 2018, but could not also take the 20 percent 199A(a) QBI deduction for the income generated from the sales to the cooperative during this period. This was a temporary issue that does not apply to most taxpayers this season.

I have many clients with 1099-PATRs, and I am still not sure how to process these returns.

First, let’s review the basics that apply to most patrons. As in the past, patronage dividends should be reported in Box one, per-unit retain allocations in Box three, and the Domestic Production Activities Deduction in Box six. The latter deduction, however, is different than before and it is reported differently by the taxpayer.  Qualified payments, a new reporting requirement for 2019, must be reported in Box 7.  This field is used to calculate the patron reduction for the qualified business income deduction. We will address these boxes one by one.

Box one: Patronage Dividends

This box should include the patron’s share of patronage dividends paid in cash and qualified written notices of allocation.

Patronage dividends are generally included in a patron’s income; however, as in the past, patronage dividends received from the purchase of personal items, such as fuel for the family or local telephone service, are not reported as income. Nor are patronage dividends received for purchasing depreciable property. In the latter case, the taxpayer will reduce the basis of the asset by the amount of the dividend, and will not include the patronage dividend in income.

In most cases, however, the patronage dividend will be attributable to the trade or business of the patron and will be included in income and qualified business income (QBI). Thus, the amount in Box one is generally reported on Schedule F, lines 3a and 3b. Those dividends that are not reported as income are reported on line 3a, but not 3b.

Box three: Per-Unit Retain Allocations

This box includes the patron’s share of total per-unit retain allocations paid in cash, qualified certificates, and other property. It should not include amounts attributable to nonqualified per-unit retain certificates, which are not presently taxable. The amount in box three should be attributable to the trade or business of the patron and will be included in income and QBI. It is reported on Schedule F, lines 3a and 3b.

When filling out lines 3a and 3b, preparers must total the appropriate amounts from Boxes one and three (and any other taxable cooperative distributions, outside the scope of this article).

Note: The PURPIM amount will often include settlement charges that are subtracted from the farmer's actual check. Farmers will deduct these expenses separately on Part II of Schedule F. PURPIM is NOT reported on line 2 of Schedule F as grain or livestock sales.

Box six: Domestic Production Activities Deduction

Although it's different from the pre-2018 section 199 DPAD deduction, the similar, yet different, post-2018 section 199A(g) deduction is still called the "DPAD deduction." Coops are required to report this deduction in Box six of the 1099-PATR. They are also required to submit a separate written notice, as they did with the Section 199 DPAD. This amount in Box six (if it is for a section 199A(g) deduction) is no longer reported on Form 8903, but is reported on line 38 of the new Form 8995-A. The amount entered on line 38 cannot exceed taxable income minus the 199A(a) QBI deduction.

Note: All patrons of agricultural and horticultural cooperatives must use Form 8995-A to calculate their section 199A deduction(s).

The 199A(a) QBI deduction (line 37 of Form 8995-A) and the 199A(g) deduction (line 38) are totaled together and entered on line 39. This amount is then reported on Form 1040, line 10. More on this calculation is detailed below.

Note: If a patron receives notice from a cooperative stating that the DPAD reported in Box six is for patrons who sold commodities in the cooperative’s fiscal year beginning in 2017, this is section 199 DPAD (old DPAD). This section 199 DPAD will, like last year, be reported on Form 8903, and carried to Form 1040 as a write-in deduction.  

Box seven: Qualified Payments

Coops are required to report qualified payments in Box seven. This is a new requirement for 2019. Regulations provide that “qualified payment" means:

Any amount of a patronage dividend or per-unit retain allocation, as described in section 1385(a)(1) or (3) received by a patron from a Specified Cooperative that is attributable to the portion of the Specified Cooperative’s QPAI, for which the cooperative is allowed a section 199A(g) deduction.   For this purpose, patronage dividends include any advances on patronage and per-unit retain allocations include per-unit retains paid in money during the taxable year.   A Specified Cooperative calculates its qualified payment using the same method of accounting it uses to calculate its taxable income.

For many clients, the amount in Box seven will equal the amounts in Boxes one and three.

What is the Patron Reduction?

Qualified payments must be reported because patrons of cooperatives are required to apply a reduction formula to their Section 199A(a) QBI (20 percent) deduction if they received qualified payments from a cooperative in 2019. This reduction applies whether the Specified Cooperative passed through some, all, or none of the Specified Cooperative’s §199A(g) DPAD deduction to its patrons in that taxable year.

The reduction is calculated on Schedule D, Form 8995-A and equals the smaller of (1) 9% of the QBI for that trade or business that is allocable to qualified payments from the Specified Cooperative or (2) 50% of patron’s W-2 wages paid that are allocable to those qualified payments.

Note: A patron who pays no wages will not reduce his or her QBI deduction because the reduction amount will be zero. Even so, it appears that these patrons must complete Schedule D.

What happens if “qualified payments” are not reported in Box seven or it looks like the number reported is in error?

We have encountered some Form 1099-PATRs without a number in Box seven. We have also encountered some 1099-PATRs with Box seven numbers very different from the numbers in Boxes one and three. In these cases, patrons should attempt to reach out to the coop for an explanation or a correction. If it is determined that the amount in Box 7 is missing and a corrected 1099-PATR will not issue, preparers should attempt to calculate the QBI deduction reduction based upon the best available information (i.e. after discussions with the cooperative it may appear that qualified payments should have equaled Boxes one and three, but the cooperative simply failed to report the amount in Box seven.) In this situation, preparers may attach a statement explaining the missing 1099-PATR information and the information used in the calculation. There may be valid reasons why the amounts in boxes 1 and 3 do not match the number in box 7. There is, however, not a likely valid explanation for box 7 being blank.

Note: The proposed regulations do not appear to give taxpayers authority to report a higher (non-reduced) qualified business income deduction if the cooperative has failed to correctly report qualified payments.  

I understand the required patron reduction, but how do I allocate QBI between that attributable to qualified payments and that attributable to other sources for purposes of the reduction calculation?

Last filing season, most returns required an allocation to accommodate the transition rule that disallowed the 199A(a) QBI deduction for qualified payments attributable to a cooperative’s tax year arising before 2018. This year, absent a notice from the cooperative that a payment is attributable to payments impacted by the transition rule, patrons can include all qualified payments attributable to their trade or business in their QBI.  This is good news and means that an allocation need only be made for purposes of the patron reduction to the QBI deduction.

Reasonable Method

The proposed regulations provide that when a patron receives both qualified payments and other income that is not a qualified payment in its trade or business, the patron must allocate those items and related deductions using a ‘‘reasonable method based on all the facts and circumstances.”

Safe Harbor Allocation

The proposed regulations also provide a safe harbor, which allows patrons with 2019 income below $160,700 for singles and $321,400 for MFJ to automatically apportion deductions and W-2 wages ratably between income from qualified payments and income other than qualified payments for purposes of calculating the QBI deduction reduction. These patrons ratably apportion items based on the proportion that the amount of qualified payments bears to the total gross receipts used to determine QBI.

The safe harbor is optional. If another ‘‘reasonable method’’ would produce an accurate, more beneficial result, the patron may use that method.[i] Different reasonable methods may be used for different items and related deductions of income, gain, deduction, and loss. The chosen reasonable method for each item must be consistently applied from one taxable year of the patron to another, and must clearly reflect the income and expenses of each trade or business. 


Adapting facts from examples 1 in the proposed regulations (page 74), allocation works like this:

"Reasonable Method" Allocation Example

In 2019, Sam, who is MFJ, has taxable income of $75,000. Sam’s 2019 QBI for his grain business is $50,000. This includes:

Patronage Dividends $20,000
Sales to independent $150,000
Per Unit Retains from Cooperative $80,000


  • $50,000 wages
  • $7,000 ½ SE Tax
  • $5,000 SE HID
  • $138,000 Schedule F expenses  
QBI Total $50,000


In the above example, Sam calculates a tentative QBI deduction related to his grain business to be $10,000 (.20 * $50,000). This is based upon the overall qualified business income from his business (including his cooperative business). Because he received qualified payments, he then must calculate a reduction to his deduction.

Calculating the Reduction

To calculate the reduction, he must first determine the QBI allocated to his qualified payments. He determines this to be $10,000, based upon his PURPIM and patronage dividends, totaling $100,000, less allocated expenses and deductions (which includes allocated ½ SE tax and the self-employed health insurance deduction) of $90,000 (including $25,000 of W-2 wages).

  • In this case, Sam allocated 50 percent of wages to his qualified payments, even though only 40 percent of gross receipts were allocable to qualified payments. He also allocated 43.3 percent of other expenses to his qualified payments. The example in the proposed regulations does not explain how Sam arrived at this reasonable method.

The tentative 20 percent QBI deduction ($10,000) is then reduced by the lesser of:

  • 9 percent of the QBI allocated to the qualified payments (.09 x $10,000) = $900 or
  • 50 percent of W-2 wages allocated to the qualified payments (.50 x $25,000)[1]

Thus, under a “reasonable method” of allocation, Sam’s final QBI deduction, after the reduction is $9,100 = (.20 x $50,000) - $900.

                Note: If Sam had paid no wages he would have had no reduction.

Safe Harbor Allocation Example

If Sam uses the safe harbor, he will allocate 40 percent or $80,000 of all expenses (including wages) to his qualified payments, and his QBI attributable to qualified payments will be $20,000. Sam’s tentative QBI deduction related to the grain trade or business is still $10,000 (.20 x $50,000). But his reduction and his final Section 199A(a) deduction will look different:

(.20 x $50,000) minus $1,800 (see reduction calculation below) = $8,200

Reduction = $1,800 = Lesser of:

  • 9 percent of the QBI allocated to the qualified payments (.09 x $20,000) = or $1,800 OR
  • 50 percent of W-2 wages allocated to the qualified payments (.50 x $20,000)[2]

Applying the safe harbor allocation, Sam is entitled to an $8,200 QBI deduction.


How do I complete the forms for the QBI deduction when I am a patron of an agricultural cooperative?

Using Sam (as detailed in the safe harbor allocation above) as our sample taxpayer, Form 8995-A, Schedule D is completed as follows:

Part II of Form 8995-A looks like this:

Part IV of the 8995-A looks like this (Notice that Sam is able to claim  both his 199A(a) deduction on line 37 and his 199A(g) deduction on line 38. These are totaled together and carried to line 10 of Form 1040):


How do I treat section 1245 gain for purposes of the QBI deduction reduction allocation?

The proposed regulations do not address this question, either in the text or in the examples. We may receive more guidance on this issue when the final regulations are issued.

1245 Gain – Safe Harbor

Under the safe harbor, it appears that section 1245 gain should be included in “gross receipts” for purposes of the prescribed pro-rata percentage: qualified payments/gross receipts.[ii] The amount of deductions apportioned to determine QBI allocable to qualified payments is equal to the proportion of the total deductions that the amount of qualified payments bears to total gross receipts used to determine QBI.  Under this guidance, farmers with income under the income threshold ($160,700/$321,400), can allocate expenses and deductions based upon the simple pro-rata formula.

Farm income from qualified payments: $100,000
Farm income from non-qualified /non-coop payments: $50,000
Section 1245 gain: $50,000
Expenses/Deductions attributable to t or b: 125,000 (incl. $15K wages)

In this basic example, the safe harbor would allow a taxpayer to allocate 50 percent of expenses to the qualified payments because $100,000 (qualified payments)/$200,000 (gross receipts) = 50 percent. Fifty percent of W-2 wages ($7,500) would also be allocated to the qualified payments for purposes of the reduction formula.

  • Overall QBI for this farming business is $75,000, leading to a tentative QBI deduction of $15,000.
  • QBI attributable to qualified payments would be $37,500.
    • The QBI deduction reduction would be the lesser of 9% of $37,500 ($3,375) or $3,750 (50% OF W-2 wages attributable to qualified payments) = $3,375.
  • Thus, the QBI deduction for this farmer under the safe harbor would be $11,625 ($15,000 – $3,375) (subject to taxable income limitations)

Section 1245 Gain - No Safe Harbor

The more difficult section 1245 allocation question is for farmers over the threshold or farmers that would fare better under a “reasonable method.”[iii]  The proposed regulations state that outside of the safe harbor, the allocation method must “clearly reflect the income and expenses” of the business.

The allocation is made to calculate a novel reduction that exists to roughly offset the section 199A(g) (new DPAD) deduction a patron may receive from the cooperative. Both the reduction and the deduction it offsets are scheduled to be temporary (arising in 2018 and ending in 2025). As such, allocation methods involving section 1245 gain that might accurately reflect income and expenses over the life of a trade or business may not be so accurate for this temporary reduction.

A reasonable allocation method outside the directives of the safe harbor may be to allocate expenses and deductions between the coop/non-coop farm income, not including 1245 gain in that allocation.

My software will not allow me to file a return for a patron of an agricultural or horticultural cooperative because my software company has not finalized Form 8995-A, Schedule D. With the March 2 deadline fast approaching for farmers who did not make estimated payments, what should I do?

The software companies were waiting to finalize some forms until the Form 8995-A Instructions were finalized. Schedule D of Form 8995-A was one of those forms. Because the final 8995-A instructions were released on February 11, companies are beginning to resolve this issue. IRS has not given farmers an extension of the deadline for penalty relief. Farmers who paid estimates by January 15 are not subject to the March 2 filing deadline. Filing a paper return (with a Schedule D printed outside of the software) is an option, but this approach is unwieldy for preparers with many farm returns.


What if I have a QBI loss for the year? Does the patron reduction impact my QBI loss calculation? Can I still take the section 199A(g) deduction?

Negative QBI attributable to a trade or business this year is calculated on Form 8995-A, Schedule C. This amount will be carried forward to next year as a QBI loss for a separate trade or business. If you have an overall QBI loss, you don’t qualify for the QBI deduction this year (see page 6 of Form 8995-A instructions).


What does this mean for the patron reduction?

The patronage reduction on Schedule D reduces the QBI deduction.[iv] If there is overall negative QBI, there is no QBI deduction, so there is no reduction. Schedule D instructions state, “You must complete Schedule D If you are a patron… and are claiming a QBI deduction in relation to your cooperative business.” In other words, if you are a patron with an overall QBI loss, you would not be subject to the reduction.

Although the regulations do not so state, it would also appear that if the QBI allocated to the cooperative is negative and the overall QBI is positive, no Schedule D is required. In such a case, the Schedule D would calculate an addition, rather than a reduction. Because the statute instructs a “reduction,” there should be no QBI deduction adjustment if the QBI attributable to the qualified payments is negative. This position is affirmed by the language of the instructions that require the reduction only if you are claiming a QBI deduction in relation to your cooperative business.

In the case of a QBI loss, a patron would still be entitled to fill out Part IV of 8995-A and report any 199A(g) DPAD. It could offset other income that is not QBI.


Must I reduce my QBI for purposes of the 199A(a) deduction by the section 199A(g) deduction since that deduction is attributable to my business? 

No. The statute prevents this result. To be “qualified items of income, gain, deduction or loss,” items must be included or allowed in determining “taxable income.” 199A(c)(3)(ii). And “taxable income” (“for purposes of this section”) does not include the 199A deduction (which would include the 199A(g) deduction). 199A(e)(1). In other words, QBI does not include the 199A(g) deduction (or the regular 199A(a) deduction) because the deduction is not included in “taxable income” for purposes of “this section” and only those items that are included in taxable income (for this section) can be qualified items of income, gain, deduction or loss.

This also reflects Congressional intent because reducing QBI by the 199A(g) deduction would create a double reduction under the statute. The patron reduction in 199A(b)(7) was intended to account for the fact that some patrons will receive a 199A(a) deduction and a 199A(g) deduction. The patron reduction essentially reduces the QBI deduction of most subject to it by 9% of QBI. This was intended to roughly correspond to (and offset) the amount of the 199A(g) deduction that might be passed through to the patron by the cooperative. If QBI were separately reduced by the deduction, this reduction would be redundant.


[1] Treas. Reg. §1.199A-1(e)(7).

[2] Treas. Reg. §1.199A-1(e)(7).

[3] One example would be where the W-2 wages were only paid for the coop business. The taxpayer would have a better result if they reduce the qualified payments’ QBI by all of the wages. That will result in a lower QBI attributable to the qualified payments and a lesser reduction.

[4] Although the proposed regulations do not define gross receipts, gross receipts are defined throughout the code to include gain from the sale of depreciated business property. See, e.g., Temp. Treas. Reg. § 1.448-1T(f)(2)(iv).

[5] For example, wages are only paid for work that generates qualified payments. In that case, you might want to allocate those wages under a reasonable method, rather than proportionately because you will have a lesser reduction.)

[6] In the case of any trade or business of a patron of a specified agricultural or horticultural cooperative, as defined in section 199A(g)(4), the amount of section 199A deduction …must be reduced.