Surprise! – IRS Guidance is Lacking
It appears that Form 8995-A Schedule D dealing with farm losses and cooperative payments have conflicting calculations by the various software vendors. We will go over how the vendors are calculating this adjustment but we can’t really tell who is right or wrong due to a lack of guidance from the IRS in their form or instructions.
Form 8995-A was originally designed as a five page form with various schedules. The final Form 8995-A was limited to a two page Form with four Schedules that can be attached as follows:
- Schedule A – Specified Service Trade or Business (does not apply to many farmers),
- Schedule B – Aggregation of Business Operations (only applies if a farmer is over the income threshold),
- Schedule C – Loss Netting and Carryforward (can apply to many farmers), and
- Schedule D – Special Rules for Patrons of Agricultural or Horticultural Cooperatives.
You would think when you see the words “special rules” that there would be a fair amount of detail to the schedule and the instructions. You would be wrong. Schedule D is only 6 lines long. The instructions for Schedule D are buried in the instructions for Form 8995-A on page 6 in the first column and are only 3 paragraphs long and give no guidance on how to calculate the Schedule and how to determine the appropriate numbers to put on the Schedule.
Now for this issue with software vendors. On Schedule D, line 2, is a negative number allowed? Assuming it is, you are to enter 9% of this number on line 3. You compare this to 50% of wages on line 4 and then enter the LESSER of the two calculations as a “Patron Reduction”. If a number is negative it will always be the “lesser” number.
If Schedule F is negative, one software company does not even prepare Schedule D if your income is under the threshold. It simply prepares Form 8995 (the simplified form) and carries the loss forward. Even if you have positive farm income but negative cooperative income listed on Schedule D (which can happen), it will not carry forward the negative to line 14 of Form 8995-A.
Now another software company will in fact carry forward the negative Schedule D number to line 14 of Form 8995-A. Line 14 is subtracted from line 13 to arrive at your QBI deduction (before DPAD) and when you subtract a negative you get a positive. This means you may have zero QBI but still get a QBI deduction based on the negative cooperative QBI listed on Schedule D.
Which software company is right? Nobody really knows since the IRS has not provided any guidance at all. We can make an argument that both software companies are correct.
It would be nice if the IRS could provide guidance before farm tax returns are due on March 2. We doubt if that will happen.
In the meantime, just understand that if the IRS issues guidance at a later date and your software company computed it incorrectly, you may get a math-error notice from the IRS, adjusting the tax with no explanation as to how the IRS came up with the number.
Paul Neiffer is a certified public accountant and business advisor specializing in income taxation, accounting services, and succession planning for farmers and agribusiness processors. Paul is a principal with CliftonLarsonAllen in Walla Walla, Washington, as well as a regular speaker at national conferences and contributor at agweb.com. Raised on a farm in central Washington, he has been immersed in the ag industry his entire life, including the last 30 years professionally. Paul and his wife purchase an 180 acre ranch in 2016 and enjoy keeping it full of animals.
I get your blog and impressed with the vast knowledge it provides. Have you published or can you direct me to guide on farming as it pertains to our current tax environment. I only have 1 farmer client and want to expand my knowledge.