The IRS has released proposed regulations (REG-118425-18) to help cooperatives and their patrons calculate the deduction for qualified business income (QBI). The proposed regulations also provide guidance for agricultural or horticultural cooperatives and their patrons regarding the deduction for domestic production activities. A related proposed revenue procedure (Notice 2019-27) details methods for agricultural or horticultural cooperatives (specified cooperatives) to calculate W-2 wages to determine a limitation on the domestic production deduction.
Proposed Regulations on the QBI Deduction
The Tax Cuts and Jobs Act of 2017 (TCJA) created section 199A, the 20% deduction for QBI. The TCJA also repealed a previous deduction for domestic production activities but reinstated a similar deduction that is now available only for specified agricultural or horticultural cooperatives. These proposed regulations offer guidance to all cooperatives and their patrons on the QBI deduction, and give more information to the specified cooperatives on the calculation of — and limitations on — the domestic production deduction.
The proposed regulations include:
- Guidance for patrons of cooperatives to calculate their QBI deduction, as well as rules for patrons of specified cooperatives who must reduce their QBI deduction if they receive certain types of payments from the cooperative.
- Guidance for specified cooperatives on the criteria they must meet to qualify for the domestic production deduction and a four-step process to calculate the deduction. The guidance includes:
- Calculation of a specified cooperative’s “domestic production gross receipts” (DPGR).
- Calculation of costs allocable to a specified cooperative’s DPGR.
- Rules for determining the applicable W-2 wage limitation.
- Rules for applying the domestic production deduction in the context of an expanded affiliated group and other special rules.
Three Methods for Calculating W-2 Wages
The proposed revenue procedure gives more detail on the W-2 wage limitation on the domestic production deduction for specified cooperatives. It describes three methods for calculating the amount of W-2 wages for purposes of determining any limitation on a specified cooperative’s deduction for the year. The three methods are similar to those used to calculate the wage limitation on the pre-TCJA domestic production deduction.
The three methods are:
- The Unmodified Box method, which uses the lessor of the total entries in Box 1 or Box 5 of all W-2 forms filed by the cooperative.
- The Modified Box 1 method, which uses total amounts from Box 1, reduced for certain nonwage (wages not subject to federal withholding) payments, and increased by amounts reported in Box 12 that are coded D, E, F, G, and S.
- The Tracking Wages method, which includes the total amount of wages subject to federal withholding and the amounts reported in Box 12 that are coded D, E, F, G, and S.
If you are part of the leadership team at a cooperative, or if you’re a patron who receives income from a cooperative, you should consult with your tax advisor to learn more about how these provisions affect your current position and future plans. For more information, please contact CRI.