The 20% Deduction for Qualified Business Income
This post is the last of three posts from Rebecca Smith, our director of cooperative taxation regarding the new Section 199A 20% business deduction for farmers who also receive distributions from coops. We will be doing additional posts on this subject over the next several weeks as we learn more on the best way to maximize this deduction.
Over the last couple days we have had several questions as to how the 20% deduction for qualified business income will work for a farm. Below we explain how the deduction is calculated and provide some examples. Based on our analysis, this deduction will be very beneficial to individuals doing business with a cooperative.
20% deduction for qualified business income (New)
-
- Effective tax years beginning after December 31, 2017 and before January 1, 2026
- Equal to the sum of
- The lesser of
- Combined qualified business income amount of the taxpayer or
- 20% of the excess, if any, of the taxpayers’ s taxable income over the sum of any net capital gain and qualified cooperative dividends
- Plus the lesser of
- 20% of qualified cooperative dividends (Qualified cooperative dividends include patronage dividends, per-unit retain allocations, qualified written notices of allocations, or similar amounts) or
- Taxable income reduced by the net capital gain
- The lesser of
- Combined qualified business income amount equals
- Sum of the amounts for each qualified trade or business
- Lesser of
- 20% of the taxpayers qualified business income with respect to the qualified trade or business or
- The greater of
- 50% of the W2 wages with respect to the qualified trade or business or
- The sum of 25% of W2 wages with respect to the qualified trade or business plus 2.5% of the unadjusted basis of all qualified property
- Note: Individuals with income less than $157.5K ($315K joint) will not be subject to the 50% wage limitation
- Lesser of
- Plus 20% of the taxpayer’s qualified REIT dividends and qualified publicly traded partnership income
- Sum of the amounts for each qualified trade or business
- Qualified business income = the net amount of qualified items of income, gain, deduction, and loss with respect to any qualified trade or business (excludes REIT dividends, qualified cooperative dividends, or qualified publicly traded partnership income)
- Note: Not a deduction to arrive at adjusted gross income (AGI)
Example 1: A farm earns $300K, pays wages of $125K, has gross cooperative distributions of $3M, and has original asset cost of $750K. The taxpayer files married filing joint. The amount deductible is calculated as follows:
Equal to the sum of
-
- The lesser of
- $0 Combined qualified business income (20% x ($300K-$3M)) Note: Since the taxpayer’s income is less than $315K the wage limitation does not apply
- $0 (20% x ($300K-($0K+$3M)
- Plus the lesser of
- $600K = 20% qualified cooperative dividends (20% x $3M)
- $300K = Taxable income reduced by net capital gain
- The farmer can deduct the $300K, bringing their taxable income to zero.
- The lesser of
Example 2: Same facts as example 1, except the farm earns $400K. The amount deductible is calculated as follows:
Equal to the sum of
-
- The lesser of
- $0 Combined qualified business income (lesser of 20% x ($400K-$3M) or greater of (50% x $125K) or (25% x $125K plus 2.5% x $750K)
- $0 (20% x ($400K-($0K+$3M)
- Plus the lesser of
- $600K = 20% qualified cooperative dividends (20% x $3M)
- $400K = Taxable income reduced by net capital gain
- The farmer can deduct the $400K, bringing their taxable income to zero.
- The lesser of
Example 3: Same facts as example 1, except the farm earns $1M. The amount deductible is calculated as follows:
Equal to the sum of
-
- The lesser of
- $0 Combined qualified business income (lesser of 20% x ($1M-$3M) or greater of (50% x $125K) or (25% x $125K plus 2.5% x $750K)
- $0 (20% x ($1M-($0K+$3M)
- Plus the lesser of
- $600K = 20% qualified cooperative dividends (20% x $3M)
- $1M = Taxable income reduced by net capital gain
- The farmer can deduct the $600K, bringing their taxable income to $400K.
- The lesser of
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.
Treating the gross grain sales as per-unit retains was just started with the DPAD deduction/treatment/lingo/etc. Now that that part of Sec 199 is gone (basically replaced by this new 20% deduction) I’m guessing your 2018 1099-PATR will not have your gross grain sales in Box 3 as a per unit retains/patronage. That was allowable under DPAD, DPAD is gone. I’m guessing there will be some corrective literature, etc here. Otherwise basically no farmer, ever, would pay income tax, unless you operate at a 20% or higher profit. Heck, any one with a net margin under 20% would have negative income. Not likely to play out this way, IMO.