Cooperative DPAD Transition Rule Presents Difficulties

The grain glitch and the fix to the grain glitch were big news during the first quarter of 2018. Then the excitement subsided.

But now with filing season approaching for the 2018 tax year, it’s important for producers and their tax advisors to review what the new law means for income received from transactions with agricultural and horticultural cooperatives in 2018, particularly the less-discussed transition rule.

Transition Rule

The grain glitch fix is complicated and creates a separate qualified business income deduction (QBID) calculation for income flowing to a patron from a sale to an agricultural or horticultural cooperative. Details of this new calculation and the law that created it can be found here.  Also included in this “fix” was a transition rule. Our March article summarized it as follows:

The new law also includes a transition rule for farmers who receive a cooperative payment in 2018 that is attributable to QPAI for which the old DPAD deduction was applicable. This will include any QPAI attributable to a cooperative tax year beginning before 2018. See Section 101(c)(2). With the original DPAD gone in 2018, taxpayers were left to wonder how to report such DPAD allocations. The law clarifies that such farmers will still be able to take the old DPAD deduction in 2018, as long as it is attributable to QPAI which was allowed to the cooperative for a tax year beginning before 2018. No 199A deduction, however, will be allowed for such payments.

This transition rule will impact a lot of returns during the 2019 filing season. Qualified payments attributable to cooperative fiscal years beginning in 2017 and ending in 2018 are not eligible for the 199A QBID. If the cooperative passes through a 199 DPAD (old) deduction in box 6 of the 1099-PATR, the taxpayer may take the DPAD deduction in 2018. That DPAD is reported on line 36 of the 1040 (see draft 1040 instructions). But those qualified payments (presumably along with their associated expenses) cannot be considered in making the 2018 QBID calculation. This would seem to be true even if the fiscal year cooperative chose not to pass the 199 DPAD (old) through.

Qualified payments received by patrons from transactions with cooperatives with tax years beginning after December 31, 2017, areeligible for the 199A QBID deduction and the 199A(g) pass-through “DPAD” deduction as explained in our March article. The old 199 DPAD does not apply to these transactions.

This assessment is based upon a straight-forward reading of the transition rule code provision. There is, however, some room for IRS interpretation. As of today, we still haven’t received proposed regulations or Notices from IRS detailing the application of the grain glitch fix. We are hoping that proposed regulations will be issued with the final regulations for 199A. These regulations are expected by year end so that they can impact 2018 returns. A lot of questions remain.

Stay tuned and we will update you as more details unfold.