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Tax Cuts and Jobs Act

Proposed QBI deduction regs for cooperatives and their patrons – Part 1

Thomson Reuters Tax & Accounting  

Thomson Reuters Tax & Accounting  

Preamble to Prop Reg REG-118425-18Prop Reg §1.199A-7, Prop Reg §1.199A-8, Prop Reg §1.199A-9, Prop Reg §1.199A-10, Prop Reg §1.199A-11, Prop Reg §1.199A-12, Prop Reg §1.1388-1; IR 2019-115

IRS has issued proposed reliance regs providing guidance to cooperatives and their patrons regarding the Code Sec. 199A qualified business income (QBI) deduction as well as guidance to specified agricultural or horticultural cooperatives (Specified Cooperatives) and their patrons regarding the Code Sec. 199A(g) domestic production activities deduction (DPAD). The proposed regs also provide guidance on Code Sec. 199A(b)(7), the rule requiring patrons of Specified Cooperatives to reduce their QBI deduction.

This is part one of a two-part article. For part 2, see Proposed QBI deduction regs for cooperatives and their patrons Part 2.

Background—Legislative history. Code Sec. 199A was enacted as part of the Tax Cuts and Jobs Act (P.L. 115-97; TCJA). Parts of Code Sec. 199A were amended in 2018, as if included in TCJA (2018 Act). Code Sec. 199Aapplies to tax years beginning after 2017 and before 2026.

In addition, the TCJA repealed former Code Sec. 199, which provided a deduction for income attributable to domestic production activities (Code Sec. 199 deduction). The repeal of former Code Sec. 199 is effective for all tax years beginning after 2017.

Background—QBI deduction. Code Sec. 199A(a) provides taxpayers a deduction of up to 20% of QBI from a domestic business operated as a sole proprietorship or through a partnership, S corporation, trust, or estate, and up to 20% of qualified real estate investment trust (REIT) dividends and publicly traded partnership (PTP) income (Code Sec. 199A(a) deduction). Code Sec. 199A(b)(7) requires patrons of Specified Cooperatives to reduce their Code Sec. 199A(a) deduction if those patrons receive certain payments from such cooperatives.

Code Sec. 199A(g) provides a deduction for Specified Cooperatives and their patrons (Code Sec. 199A(g) deduction) that is based on the former Code Sec. 199 deduction.

Before the amendments of the 2018 Act, Code Sec. 199A(g) provided a modified version of the Code Sec. 199A(a) deduction for Specified Cooperatives.

Final regs were published in February 2019. (TD 9847TD 9847 did not address patrons’ treatment of payments received from Cooperatives for purposes of Code Sec. 199A(a) or the Code Sec. 199A(g) deduction for Specified Cooperatives, though it did restate the reduction required under Code Sec. 199A(b)(7). See Reg §1.199A-1(e)(7).

Background—Code Sec. 199A(a) deduction not available to cooperatives. Code Sec. 199A(a) may allow a taxpayer a deduction of up to 20% of QBI from a domestic business operated as a sole proprietorship or through a partnership, S corporation, trust, or estate, and up to 20% of qualified REIT dividends and PTP income. A Code Sec. 199A(a) deduction is not available for wage income or for business income earned through a C corporation. C corporations are not eligible for the Code Sec. 199A(a) deduction. Cooperatives are C corporations for Federal income tax purposes and, therefore, are not eligible for the Code Sec. 199A(a) deduction.

Similarly, patrons that are C corporations are also not eligible for the Code Sec. 199A(a) deduction. However, patrons that are individuals are eligible for the Code Sec. 199A(a) deduction. Reg. §1.199A-1(a)(2) provides that, for purposes of applying the rules of Reg. §1.199A-1 through Reg. §1.199A-6, a reference to an individual includes a reference to a trust (other than a grantor trust) or an estate to the extent that the Code Sec. 199A(a) deduction is determined by the trust or estate under the rules of Reg. §1.199A-6.

The benefits of Code Sec. 199A(a) are limited to individuals with income from a trade or business as defined in Code Sec. 199A(d)(1) and Reg. §1.199A-1(b)(14) (trade or business) with QBI. To the extent a patron operating a trade or business has income directly from that business (as opposed to receiving a patronage dividend from a Cooperative), the patron must follow the rules of Reg. §1.199A-1 through Reg. §1.199A-6 to calculate the Code Sec. 199Adeduction.

Background—QBI of patrons. Although Cooperatives are C corporations for Federal income tax purposes, Code Sec. 1382(b) and Code Sec. 1382(c) allow Cooperatives to determine taxable income after deducting distributions of patronage dividends or similar payments to patrons.

The effect of these deductions is to remove the distributions from income taxed at the Cooperative level, leaving it subject to income tax only at the patron level. Exempt and nonexempt Cooperatives are both permitted to deduct patronage distributions if they satisfy the requirements described in Code Sec. 1382(b). Only exempt Cooperatives are permitted to also deduct nonpatronage distributions if the requirements under Code Sec. 1382(c) are met. Cooperatives are subject to Federal income tax on income for which no deduction may be taken under Code Sec. 1382(b) or Code Sec. 1382(c), in the same manner as any C corporation.

Reg. §1.199A-3(b) contains the general rules regarding QBI. QBI is the net amount of qualified items of income, gain, deduction, and loss with respect to any trade or business as determined under those rules. While income from the ownership of a C corporation is generally not QBI, Code Sec. 199A provides a special rule for patrons receiving patronage dividends from a Cooperative. Code Sec. 199A(c)(3)(B)(ii) provides that any amount described in Code Sec. 1385(a)(1), which concerns patronage dividends, is not treated as an exclusion to a patron’s QBI.

Unlike nonexempt Cooperatives, exempt Cooperatives are permitted to deduct nonpatronage distributions under Code Sec. 1382(c). As a result, this income is subject to taxation only at the patron level.

TD 9847 generally provides that income is tested at the trade or business level where it is directly generated.

Background—Specified service trade or business (SSTB). Code Sec. 199A(c)(1) provides that only items attributable to a qualified trade or business are taken into account in determining the Code Sec. 199A(a) deduction for QBI. Under Code Sec. 199A(d)(1) a “qualified trade or business” excludes (A) an SSTB or (B) the trade or business of performing services as an employee.

TD 9847 provides that, unless an exception applies, if a trade or business is an SSTB, none of its items are to be taken into account for purposes of determining a taxpayer’s QBI.

Under Code Sec. 199A(d)(3), individuals with taxable income not exceeding the threshold amount ($315,000 in the case of joint returns and $157,500 for all other taxpayers for any taxable year beginning before 2019), are not subject to a restriction with respect to SSTBs. For taxable years beginning after 2018, see Rev Proc 2018-57, 2018-49 IRB 827, or its successor.

Therefore, if an individual has taxable income not exceeding the threshold amount, the individual is eligible for the Code Sec. 199A(a) deduction with respect to qualified items of income, gain, deduction, and loss from the SSTB notwithstanding that the trade or business is an SSTB. The inapplicability of the SSTB rules, W-2 wage limitation, and UBIA of qualified property limitation in computing the Code Sec. 199A(a) deduction is subject to a phase-in for individuals with taxable income within the phase-in range. See Reg. §1.199A-5 for the rules relating to SSTBs.

Background—Determination of W-2 wages and UBIA of qualified property. Reg. §1.199A-1(d) addresses the calculation of the Code Sec. 199A(a) deduction for individuals with taxable income exceeding the threshold amount and provides guidance on the application of these limitations.

All of the rules relating to the REIT dividends and the qualified PTP income component of the Code Sec. 199A(a) deduction applicable to individuals with taxable income not exceeding the threshold amount also apply to individuals with taxable income exceeding the threshold amount.

The QBI component of the Code Sec. 199A(a) deduction, however, is subject to limitations for individuals with taxable income exceeding the threshold amount. These include the limitations based on the W-2 wages of the trade or business or a combination of the W- 2 wages and the UBIA of qualified property.

Under Reg. §1.199A-2, W-2 wages and UBIA of qualified property are determined by the individual or relevant passthrough entity (RPE) that directly conducts the trade or business.  Code Sec. 199A(f)(1)(A)(iii) requires that S corporations and partnerships allocate W-2 wages and UBIA of qualified property to their owners in accordance with each owner’s applicable share, and Reg. §1.199A-6 contains additional information regarding these reporting requirements. Code Sec. 199A does not provide a similar rule for Cooperatives.

Code Sec. 199A(c)(3)(B)(ii) provides that patronage dividends or similar payments may be treated as qualified items of income. Only the Cooperative knows the origin and character of the patronage dividends or similar payments. As a result, the Cooperative must determine if these payments meet the statutory requirements in Code Sec. 199A(c)(3), and must provide information to the patron for it to compute its Code Sec. 199A(a) deduction. In contrast, Code Sec. 199A contains special rules for W-2 wages and UBIA of qualified property.

Background—Special rules for patrons of specified cooperatives. Code Sec. 199A provides special rules for patrons of Specified Cooperatives. Because patrons of Specified Cooperatives may be eligible to take both a Code Sec. 199A(a) and Code Sec. 199A(g) deduction, Code Sec. 199A(b)(7) provides that if a trade or business of a patron of a Specified Cooperative receives qualified payments (as defined in Code Sec. 199A(g)(2)(e) and Prop Reg §1.199A-8(d)(2)(ii)) from such Specified Cooperative that are included in the patron’s QBI, the patron must reduce its Code Sec. 199A(a) deduction by the lesser of (i) 9% of so much of the QBI with respect to such trade or business that is properly allocable to qualified payments from the Specified Cooperative, or (ii) 50% of so much of the patrons’ W-2 wages (determined under Code Sec. 199A(b)(4)) with respect to such trade or business as are so allocable.

This reduction is required by Code Sec. 199A(b)(7) whether the Specified Cooperative passes through all, some, or none of the Specified Cooperative’s Code Sec. 199A(g) deduction to the patron in that tax year.

Reg. §1.199A-3(b)(5) provides an allocation method for items of QBI attributable to more than one trade or business. That allocation method also applies to patrons with multiple trades or businesses.

Background—Transition rule. Congress provided a special transition rule relating to qualified payments under former Code Sec. 199 made by Specified Cooperatives in Sec. 101 of the 2018 Act.

Under this transition rule, the repeal of former Code Sec. 199 for tax years beginning after December 31, 2017, does not apply to former Code Sec. 199 qualified payments received by a patron from Specified Cooperatives in a tax year beginning after December 31, 2017, to the extent such qualified payments are attributable to qualified production activities income (QPAI) with respect to which a deduction is allowable to the Specified Cooperatives under former Code Sec. 199 for a tax year of the Specified Cooperatives beginning before January 1, 2018.

Such qualified payments remain subject to former Code Sec. 199, and any deduction under former Code Sec. 199 allocated by the Specified Cooperatives to their patrons related to such qualified payments may be deducted by such patrons in accordance with former Code Sec. 199. In addition, no deduction is allowed under Code Sec. 199A(a) and Code Sec. 199A(g) with respect to such qualified payments.

Background—Rules for passing Code Sec. 199A(g) deduction to patrons. Once a Specified Cooperative calculates the Code Sec. 199A(g) deduction, it may pass on the Code Sec. 199A(g) deduction to patrons who are eligible taxpayers as defined in Code Sec. 199A(g)(2)(D), that is, (i) a patron that is other than a C corporation or (ii) a patron that is a Specified Cooperative. Code Sec. 199A(g)(2)(A) requires the Specified Cooperative to identify the amount of the Code Sec. 199A(g) deduction being passed to a patron in a notice (required by Prop Reg §1.199A-8(d)(3)) mailed to the eligible patron during the payment period described in Code Sec. 1382(d).

The amount of the Code Sec. 199A(g) deduction that a Specified Cooperative can pass through to an eligible taxpayer is limited to the portion of the Code Sec. 199A(g) deduction that is allowed with respect to the QPAI to which the qualified payments made to the eligible taxpayer are attributable.

Code Sec. 199A(g)(2)(E) defines qualified payments as those that are included in the eligible taxpayer’s income under Code Sec. 1385(a)(1) and Code Sec. 1385(a)(3) (referencing patronage dividends and per-unit retain allocations).

Background—Domestic production gross receipts. Code Sec. 199A(g)(3)(D) defines the term domestic production gross receipts (DPGR) to mean gross receipts of a Specified Cooperative derived from any lease, rental, license, sale, exchange, or other disposition (collectively, a “disposition”) of any agricultural or horticultural product which was manufactured, grown, produced, or extracted (MPGE) (determined after application of Code Sec. 199A(g)(4)(B)) by the Specified Cooperative in whole or significant part within the U.S. Such term does not include gross receipts of the Specified Cooperative derived from a disposition of land or from services.

Proposed regs—Prop Reg §1.199A-7, rules for patrons of cooperatives. To the extent a patron receives patronage dividends or similar payments from a Cooperative, in addition to following the rules of Reg. §1.199A-1 through Reg. §1.199A-6 to calculate the Code Sec. 199A deduction, the patron must also follow the additional special rules and clarification in Prop Reg §1.199A-7.

For these purposes, patronage dividends or similar payments include money, property, qualified written notices of allocations, qualified per-unit retain certificates for which an exempt or nonexempt Cooperative receives a deduction under Code Sec. 1382(b), nonpatronage distributions paid in money, property, qualified written notices of allocation, as well as money or property paid in redemption of a nonqualified written notice of allocation for which an exempt Cooperative receives a deduction under Code Sec. 1382(c)(2) (hereinafter collectively referred to as patronage dividends or similar payments).

Prop Reg §1.199A-7(c) and Prop Reg §1.199A-7(d) provide that these patronage dividends or similar payments may be included in the patron’s QBI to the extent that these payments: (i) are related to the patron’s trade or business, (ii) are qualified items of income, gain, deduction, or loss at the Cooperative’s trade or business level, (iii) are not income from a specified service trade or business (SSTB), as defined in Code Sec. 199A(d)(2), at the Cooperative’s trade or business level (except as permitted by the threshold rules, see Reg. §1.199A-5(a)(2)), and (iv) provided the patron receives certain information from the Cooperative about these payments (Prop Reg §1.199A-7(c)(3) and Prop Reg §1.199A-7(d)(3)).

Prop Reg §1.199A-7(e)(3) provides that in situations in which a patron conducts a trade or business that receives patronage dividends or similar payments from a Cooperative, the W-2 wages and unadjusted basis immediately after acquisition (UBIA) of qualified property considered are those of the patron’s trade or business and not of the Cooperative that directly conducts the trade or business from which the payments arise.

Proposed Regs—QBI of patrons. Prop Reg §1.199A-7(c) provides that patronage dividends or similar payments (as discussed above) are included in calculating QBI for purposes of the patrons’ Code Sec. 199A(a) deduction provided the amounts are otherwise qualified items. To be otherwise qualified, these amounts must be qualified items of income, gain, deduction, and loss under Code Sec. 199A(c)(3).

Prop Reg §1.199A-7(c) provides that a patron’s QBI can include payments to patrons for which the exempt Cooperative receives a deduction under Code Sec. 1382(c)(2) in addition to payments for which the exempt Cooperative receives a deduction under Code Sec. 1382(b). That is, amounts paid under Code Sec. 1382(c)(2) are treated by a patron as equivalent to patronage dividends under Code Sec. 1382(b) for purposes of QBI. Amounts paid under Code Sec. 1382(c)(1) (dividends on capital stock), however, are dividends from ownership of C corporations, which are not included in QBI.

The prop regs also provide that patronage dividends or similar payments are considered to be generated from the trade or business the Cooperative conducts on behalf of or with the patron, and are tested by the Cooperative at its trade or business level.

A patron must determine QBI for each trade or business it directly conducts. However, in situations where the patron receives a distribution from a Cooperative that is a patronage dividend or similar payment, the Cooperative determines whether that distribution contains qualified items of income, as defined under Reg. §1.199A-3(b), and reports that information to the patron. The patron needs this information to determine its Code Sec. 199A(a) deduction, and the Cooperative directly conducting the trade or business from which the distribution is derived is in the best position to know whether the patronage dividend or similar payment contains qualified items.

The Cooperative must report this information regardless of whether the patron’s taxable income exceeds the threshold amount ($315,000 in the case of joint returns and $157,500 for all other taxpayers for any taxable year beginning before 2019). For taxable years beginning after 2018, see Rev Proc 2018-57, 2018-49 IRB 827, or its successor (relating to inflation adjustments).

A patron must use that information when determining the patron’s Code Sec. 199A(a) deduction. For example, if the Cooperative determines an entire distribution does not contain any qualified item of income, gain, deduction, and loss because it is not effectively connected with the conduct of the Cooperative’s trade or business within the United States, the Cooperative does not include such amount when reporting qualified items to the patron, and the patron does not include the distribution in the patron’s QBI.

In addition, to the extent the distribution includes interest income that is not properly allocable to the Cooperative’s trade or business on behalf of, or with, its patrons, the distribution is not a qualified item of income, gain, deduction, and loss. As a result, the Cooperative does not include such amount when reporting qualified items to the patron, and the patron does not include the income in the patron’s QBI.

Prop Reg §1.199A-7(c)(3) provides that the Cooperative must report the amount of qualified items of income, gain, deduction, or loss in the distributions made to the patron on an attachment to or on the Form 1099-PATR, Taxable Distributions Received From Cooperatives (Form 1099-PATR) (or any successor form), issued by the Cooperative to the patron, unless otherwise provided by the instructions to the Form. The Cooperative does not include any items from an SSTB in reporting the amount of qualified items of income, gain, deduction, and loss and must instead follow Prop Reg §1.199A-7(d) for income from an SSTB.

If a patron does not receive such information from the Cooperative on or before the due date of the Form 1099-PATR, the amount of distributions from the Cooperative that may be included in the patron’s QBI is presumed to be zero. This presumption does not apply to amounts of qualified items of income, gain, deduction and loss to the extent that they were not reported on the Form 1099-PATR or attachment thereto before the publication of the proposed regs (to wit, 6/19/2019).

These rules apply to both exempt and nonexempt Cooperatives as well as patronage and nonpatronage distributions.

Proposed regs—SSTB. Prop Reg §1.199A-7(d) clarifies that a patron (whether the patron is a RPE or an individual) must determine whether the trades or businesses it directly conducts are SSTBs.

The proposed regs also provide that in the case of a patron’s trade or business that receives patronage dividends or similar payments distributed from a Cooperative, the Cooperative must determine whether the distributions from the Cooperative include items of income, gain, deduction, and loss from an SSTB directly conducted by the Cooperative, and whether such items are qualified items with respect to such SSTB. The Cooperative must report to the patron the amount of qualified items of income, gain, deduction, and loss from an SSTB directly conducted by the Cooperative.

The patron then determines if the distribution may be included in the patron’s QBI depending on the patron’s taxable income and the statutory phase-in and threshold amounts.

Because the Cooperative may not know whether the patron’s taxable income exceeds the threshold amount, the Cooperative must report this information to all patrons. Without this information, a patron with taxable income within the phase-in range or below the threshold amount would not have the information necessary to take into account the amount of qualified items of income, gain, deduction, and loss from an SSTB in determining the patron’s Code Sec. 199A(a) deduction for QBI. Reg. §1.199A-5 is applied by the Cooperative to determine if the trade or business is an SSTB. For example, the Cooperative will apply the Reg. §1.199A-5(c)(1) gross receipts de minimis rules to determine if the trade or business is an SSTB.

Prop Reg §1.199A-7(d)(3) provides that the Cooperative must report to the patron the amount of SSTB income, gain, deduction, and loss in distributions that is qualified with respect to any SSTB directly conducted by the Cooperative on an attachment to or on the Form 1099-PATR (or any successor form) issued by the Cooperative to the patron, unless otherwise provided by the instructions to the Form.

If the Cooperative does not report the amount on or before the due date of the Form 1099-PATR, then only the amount that a Cooperative reports as qualified items of income, gain, deduction, and loss under Prop Reg §1.199A-7(c)(3)may be included in the patron’s QBI, and the remaining amount of distributions from the Cooperative that may be included in the patron’s QBI is presumed to be zero. This presumption does not apply to amounts of qualified items of income, gain, deduction and loss to the extent that they were not reported on the Form 1099-PATR or attachment thereto before the publication of the proposed regs (6/19/2019).

These rules apply to both exempt and nonexempt Cooperatives as well as to patronage and nonpatronage distributions.

Proposed Regs—Determination of W-2 wages and UBIA of qualified property. As discussed in “Background—Determination of W-2 wages and UBIA of qualified property” above, to provide that Cooperatives allocate their W-2 wages and UBIA of qualified property to their patrons would be to treat the Cooperatives as RPEs when they are C corporations. Therefore, Prop Reg §1.199A-7(e) provides that patrons directly conducting trades or businesses that receive patronage dividends or similar payments from a Cooperative calculate the W-2 wage and UBIA of qualified property limitations at the patron level based on the patron’s trades or businesses, without any regard to the Cooperative’s W-2 wages or UBIA of qualified property.

Proposed Regs—Special rules for patrons of specified cooperatives.  Prop Reg §1.199A-7(f)(2) provides an additional similar allocation method (to the one discussed above in “Background—Special rules for patrons of specified cooperatives”) in situations where a patron receives qualified payments and income that is not a qualified payment in a trade or business.

The patron must allocate those items using a reasonable method based on all the facts and circumstances. Different reasonable methods may be used for different items of income, gain, deduction, and loss. The chosen reasonable method for each item must be consistently applied from one taxable year to another and must clearly reflect the income and expenses of each trade or business. The overall combination of methods must also be reasonably based on all the facts and circumstances. The books and records maintained for a trade or business must be consistent with any allocations.

Because the Code Sec. 199A(b)(7) reduction applies to the portion of a patron’s QBI that relates to qualified payments from a Specified Cooperative, the proposed regs provide a safe harbor allocation method for patrons with taxable income not exceeding the threshold amounts set forth in Code Sec. 199A(e)(2) to determine how to calculate the Code Sec. 199A(b)(7) reduction.

The safe harbor allocation method is intended to provide a straightforward method for patrons if their trade or business receives qualified payments from a Specified Cooperative in addition to other income.

To calculate the required Code Sec. 199A(b)(7) reduction, the patron must allocate the aggregate business expenses and W-2 wages between qualified payments and other gross receipts.

The safe harbor allocation method allows patrons to allocate by ratably apportioning business expenses and W-2 wages based on the proportion that the amount of qualified payments bears to the total gross receipts used to determine QBI.

Further, to make the calculation required by Code Sec. 199A(b)(7), the patron will need to know the qualified payments allocable to the patron that were used in calculating a Specified Cooperative’s Code Sec. 199A(g) deduction. In order to enable the patron to make this calculation, Prop Reg §1.199A-7(f)(3) requires the Specified Cooperative to report the amount of such qualified payments on an attachment to or on the Form 1099-PATR (or any successor form) issued by the Cooperative to the patron, unless otherwise provided by the instructions to the Form.

Proposed Regs—Transition rule. With regards to the transition rule discussed above, Prop Reg §1.199A-7(h)(3) and Prop Reg §1.199A-8(h)(3) provide that the Cooperative must identify in a written notice to its patrons that a Code Sec. 199A(a) deduction cannot be claimed for qualified payments that otherwise would constitute QBI in the patron’s trade or business in a taxable year in which the qualified payments remain subject to former Code Sec. 199.

The Cooperative must report this information on an attachment to or on the Form 1099-PATR (or any successor form) issued by the Cooperative to the patron, unless otherwise provided by the instructions to the Form.

Proposed Regs—DPAD deduction for specified cooperatives. Code Sec. 199A(g) provides a deduction for Specified Cooperatives and their patrons that is similar in many respects to the deduction under former Code Sec. 199.

Prop Reg §1.199A-8 provides definitions relating to the Code Sec. 199A(g) deduction, establishes the criteria that a Specified Cooperative must satisfy to be eligible to claim the Code Sec. 199A(g) deduction, and sets forth the necessary steps for a Specified Cooperative to calculate the Code Sec. 199A(g) deduction.

Prop Reg §1.199A-8 defines the terms patron, Specified Cooperative, and agricultural or horticultural products. Prop Reg §1.199A-8 cross-references the definition of patron found in Reg. §1.1388-1(e).

The definition of Specified Cooperative is consistent with the definition set forth in Code Sec. 199A(g)(4).

Prop Reg §1.199A-8(a)(4) defines agricultural or horticultural products as agricultural, horticultural, viticultural, and dairy products, livestock and the products thereof, the products of poultry and bee raising, the edible products of forestry, and any and all products raised or produced on farms and processed or manufactured products thereof within the meaning of the Cooperative Marketing Act of 1926, 44 Stat. 802 (1926). Agricultural or horticultural products also include aquatic products that are farmed whether by exempt or nonexempt Specified Cooperatives. See Rev Rul 64-246, 1964-2 C.B. 154.

A Specified Cooperative’s gross receipts from the disposition of agricultural or horticultural products qualify as DPGR if the products were MPGE by the Specified Cooperative in whole or significant part within the United States. The proposed regs define in whole or significant part for these purposes in Prop Reg §1.199A-9(h) and provide a 20% safe harbor for such determination in Prop Reg §1.199A-9(h)(3).

The definition of gross receipts in Prop Reg §1.199A-8(b)(2)(iii) is essentially the same as in Reg. §1.199-3(c) issued under former Code Sec. 199, except that this definition has been modified by removing references to Code Sec. 1031 (exchange of real property held for productive use or investment) and tax-exempt interest within the meaning of Code Sec. 103 (interest on State and local bonds). The reference to Code Sec. 1031 is removed because that provision now applies only to real property.

The Code Sec. 199A(g) deduction is based on gross receipts derived from the disposition of agricultural or horticultural products and Code Sec. 199A(g)(3)(D)(i) expressly excludes gross receipts derived from the disposition of land from DPGR. The reference to tax-exempt interest under Code Sec. 103 is removed because it is appropriate for the definition of gross receipts to include only gross receipts that are taken into account in computing gross income under the Cooperative’s methods of accounting used for Federal income tax purposes for the tax year.

References. For QBI deduction allowed for patrons receiving qualified payments from specified agricultural or horticultural cooperatives for 2018–2025, see FTC 2d/FIN ¶L-4316United States Tax Reporter ¶199A.21.

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