Final regulations: Domestic production activities deduction for agricultural, horticultural cooperatives

Domestic production activities deduction

The U.S. Treasury Department and IRS today released for publication in the Federal Register final regulations (T.D. 9947) relating to application of the domestic production activities deduction under section 199A for specified agricultural or horticultural cooperatives.

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Read the final regulations [PDF 442 KB] (181 pages) that are scheduled to be published in the Federal Register on January 19, 2021.

These regulations finalize regulations that were proposed in June 2019. The purpose of this report is to provide text of the final regulations.

Background

As enacted in the 2017 tax law (Pub. L. No. 115-97, or the “Tax Cuts and Jobs Act”), section 199A generally provides a deduction for qualifying income of certain noncorporate owners of some pass-through entities and sole proprietorships.

The Consolidated Appropriations Act attempted to address certain concerns raised within the agricultural industry, and (effective for tax years beginning after December 31, 2017) section 199A was modified to:

  • Restore prior-law section 199 treatment for specified agricultural and horticultural cooperatives under new section 199A(g)
  • Allow eligible patrons to claim a deduction passed through from a specified agricultural and horticultural cooperative
  • Revise the patron-level deduction to 20% of taxable income or qualified business income (in line with all other non-corporate taxpayers), with limitations for patrons (e.g., farmers) with high taxable incomes or capital gains, and further modifications for patrons who enter into transactions with a cooperative

As discussed in TaxNewsFlash, the June 2019 proposed regulations addressed topics to:

  • Provide rules for cooperatives and their patrons under section 199A(a) (the deduction for qualified business income)
  • Provide rules for the section 199A(g) deduction for income attributable to domestic production activities of specified agricultural or horticultural cooperatives
  • Define domestic production gross receipts (DPGR) for purposes of section 199A(g)
  • Provide rules for allocation of cost of goods sold (COGS) and other deductions to DPGR for purposes of section 199A(g)
  • Provide rules for the determination of the W-2 wage limitation for purposes of section 199A(g)
  • Define expanded affiliated groups for purposes of section 199A(g)
  • Define “patronage” and “nonpatronage” for purposes of section 1388
  • Remove final regulations under former section 199 and withdraw proposed regulations under former section 199

Those regulations were proposed to be effective for tax years beginning after the date of publication of a Treasury decision adopting them as final regulations in the Federal Register, but taxpayers could rely on the proposed regulations in their entirety before their finalization.


For more information, contact KPMG’s National Director of Cooperative Tax Services:

David Antoni | +1 (267) 256-1627 | dantoni@kpmg.com


Associate National Director of KPMG’s Cooperative Tax Services:

Brett Huston | +1 (916) 554-1654 | bhuston@kpmg.com

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