The Farm CPA

Section 199A Does Offset Other Income

We got the following comment from a reader:

"Many smaller farmers have W-2 income and/or other self employment income. Assuming a Sec 199a deduction from a co-op creates a "loss" for these farmers who operates as a sole proprietor, is the loss currently deductible "for adjusted gross income" as in previous years?"

Under old Section 199 DPAD, this deduction did in fact reduce Adjusted Gross Income (AGI) and was allowed to offset other sources of income.  However, DPAD could not increase a net operating loss.

New Section 199A does not reduce AGI.  Instead, this deduction is allowed after itemized deductions and right before taxable income.  The overall limit on the Section 199A deduction continues to remain taxable income with one additional component.  Taxable income has to be reduced by any capital gains or qualified dividend income.  The section 199A deduction was designed to compete with the new 21% corporate tax rate.  Long-term capital gains and qualified dividend income already has a top income tax rate of 20%; therefore, Congress felt that there was no reason to provide any additional deduction for this type of income.

Old Section 199 DPAD was allowed to reduce capital gain income.  However, that was a special deduction for taxpayers with domestic production activities only.  It did not apply to all taxpayers.  The new Section 199A deduction does apply to all taxpayers.

Since 199A does not reduce AGI, it can have some unfavorable consequences.  First, if a taxpayer owes repayment of an ACA premium subsidy, the Section 199A deduction cannot help them reduce the repayment amount.  Second, many phase-outs are based on AGI.  Since Section 199A will not reduce AGI, more of your deduction may be phased-out.  Third, most states calculate taxes starting with AGI.  Therefore, in those states, the Section 199A deduction will not be allowed.  Even if they start with taxable income, many states will not allow the deduction anyway.

Remember, Section 199A can help reduce your federal taxable income, but it likely will not reduce your state taxable income and will have no effect on your self-employment tax liability.