A Closer Look at the 199A Tax “Fix”

Rod Mauszycki indicated last week at DTN that, “The recently passed budget bill contains a ‘fix’ for the Section 199A dilemma with respect to sales to cooperatives. As such, it’s appropriate to review the changes to get an idea of how it will work.

“For non-corporate farmers, the changes to Section 199A will have minimal detrimental effect compared to the pre-2018 Section 199 provision. Section 199A’s deduction is limited to 20% of the taxpayer’s ordinary income, except for the pass-through deduction from a cooperative (discussed below).

“Lower-income farmers may claim a deduction equal to 20% of qualified business income. A high-income farmer’s deduction may be limited to the greater of 50% of W-2 wage expense or 25% of wages plus 2.5% of qualified investment in depreciable property (the wage/investment limitation).”

The update explained, “In almost all cases, Section 199A will result in a larger deduction than under the pre-2018 Section 199, Domestic Production Activities Deduction (DPAD). At worst, a farmer will get an 11% deduction. This is greater than then 9% under DPAD, which was limited by 50% wages paid. Under DPAD, if you had no wages, the only DPAD that could be claimed was the amount of DPAD passed through a cooperative.

“For those non-corporate farmers selling to cooperatives, a deduction equal to 20% of net business income on such sales, subject to wage or wage/investment limitations, is available. The deduction will be reduced by an amount equal to the old DPAD benefit (9% of net income from sales to a co-op or 50% wages attributed to those sales). In addition, the farmer will be able to claim the pass-through deduction from the cooperative, regardless of character of income, wages or qualified investment in depreciable property.

“Farmers that operate as a C corporation may or may not benefit from the new 199A. Under the new law, C corporations are not entitled to any Section 199A deduction. As a tradeoff, C corporations’ tax rates dropped from a maximum 35% to a flat 21%. That is a 40% tax reduction. However, if the farm C corporation taxable income was always under $50,000, it was previously taxed at 15%. The increase to 21% is a 40% tax increase. The purpose of the Section 199A deduction is to lower the business tax rate for non-corporations to level the playing field.”

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