As if all of the changes in the federal tax code (and the noncompliance by Iowa) in 2018 weren’t enough, we find the situation further complicated for farmers who sold grain to cooperatives of which they were members. They have a potential to have their farm income split into three buckets for purposes of the new Section 199A deduction in 2018.
The first bucket is the sales cooperative members made to cooperatives who operate on a fiscal year. Part of the ‘fix’ of the ‘grain glitch’ was a transitional rule that allowed fiscal year cooperatives to pass through a DPAD deduction to members who sold grain in the cooperatives fiscal year ending in 2018. Without the ‘fix’, that deduction couldn’t be passed through to members. Farmers who receive the passthrough will be able to deduct it without limitation. That’s a good thing. However, that prohibits member farmers using grain sales to these cooperatives from January 2018 to the end of the cooperative’s fiscal year for their own Section 199A deduction. Iowa State’s Center for Agricultural Law and Taxation explains this aspect more fully here. Depending on their individual tax situation in 2018, this is a good, bad, or neutral thing.
The second bucket is permanent, barring other legislation. At all levels of taxable income, members who sell their grain to cooperatives are subject to additional potential limitations to their Section 199A deduction. Again, Iowa State provides an excellent summary.
The third bucket is whatever’s left. That remaining farm income enters the rest of the pool for the potential Section 199A deduction.
Yes, it is all complex. It is impossible to say who will benefit and who will be hurt by these rules. It all depends on the taxpayer’s total situation. Like everything else in tax law, it is what it is. But taxpayers should be ready to provide their preparer more information than they have in the past. This is an area where compliance is more difficult, but IRS may find this area one where audits will be concentrated. They can match 1099-PATR to farmers. So, we slog on and do our best…