The Farm CPA

Some Q & A on Section 199A

We have gotten multiple comments on the blog over the last few weeks on Section 199A. I am using today's blog post as a simple Q & A in answering some of these comments.

I assume that we would limit the amount we reduce QBI by to the amount we are allowed to deduct against taxable income. Meaning, I would not create a QBI loss carry-forward by deducting the full amount of self- employed health insurance paid even if I was limited in what I can deduct when calculating taxable income.

Correct.  QBI is only reduced by the deduction that is allowed on the income tax return.  For example, in the comment, self-employed health insurance is only allowed to the extent that you have business income.  It can only reduce QBI to zero.

If I have 2 “buckets” of farm income – one of grain sold prior to the fiscal year end which makes up 40% and one after the fiscal year end which makes up 60%, I understand I only deduct 60% of the SE tax, but do I also only deduct 60% of the SE health insurance, since the other 40% is allocable to non-qualified income?

Correct, the 40% of SE health insurance before the FYE is not deducted against QBI.

Wondering then if you have a Sch F with coop sales so that part of the ‘F’ is QBI (Qualified Business Income) and the remainder is non-QBI, are you allowed to allocate the SE tax and health insurance deduction and retirement plan contributions between QBI and non-QBI as well?

Correct, as stated in the previous comment answer, you allocate between QBI and non-QBI portions.

Could you comment on how pass-through gain on sale of Section 179 assets will affect QBI and how to report its potential effect on QBI on Schedule K-1? This gain is “technically” unkown by the pass-through as it is determined at the partner or shareholder level based on previous Sec 179 taken by that partner/shareholder on the asset sold. As 1245/ordinary gain, I assume it would increase QBI but would like to verify. Also, how would this potential increase to QBI be reported on Schedule K-1? I understand how to report the information for the 179 pass-through gain but I am not sure how to report the potential increase to QBI from the pass-through gain. Sorry for the long question but appreciate any advice.

This gain from the sale of Section 179 assets will be QBI income (assuming it is from a trade or business asset).  I would put a footnote in the Schedule K-1 indicating that the gain from the sale of these assets may increase QBI if it is determined that there is a gain at the owner level. I also do not reduce QBI for Section 179 shown on Schedule K-1 since we don''t know if the owner can deduct the expense, therefore, I put a footnote indicating that may reduce QBI if allowed at the owner level.

If the co-op 1099s received this year does not show any per unit retains and they do not pass out a DPAD then how do I know as a tax preparer what was done on the co-op side. I have 1099s that show patronage dividends only. Based on that information how do I make adjustments to the Section 199A deduction?

The technical answer is that you need to ask the question of the cooperative.  What is their year-end and how much payments were used in calculating their DPAD for the FYE 2018 tax return under Section 199.

Thanks so much for your blog! Regarding the “grain glitch” and the 9% reduction much has been said about the cooperatives distributing DPAD in December of 2017 or perhaps even in 2018. This has led to much confusion within my firm….what if the cooperative that my client does business with did NOT pass out any DPAD in 2017 or 2018? If that is the case does my client still have three buckets or does he now only have two. Secondly, if he got no DPAD does he still have to reduce the coop sales by 9% or does he in fact now only have ONE BUCKET?

There continues to be confusion on this subject.  It does not matter whether the cooperative passes out DPAD or not.  These receipts before the FYE will be in Bucket # 1 if the cooperative used them in calculating their Section 199 DPAD.

Keep the comments going. We try to respond to each comment in the blog, however, with this being tax season, the response may not be quite as timely.