IRS Notice 2018-59: QBI Deductions for Cooperatives

IRS Notice 2018-59 provided initial guidance following changes introduced by the Tax Cuts and Jobs Act of 2017 (TCJA). This notice specifically addressed the new Section 199A Qualified Business Income (QBI) deduction as it applies to agricultural and horticultural cooperatives and their patrons. The TCJA created rules and an issue known as the “grain glitch,” which this interim guidance sought to clarify. The primary purpose of the notice was to establish the methods for calculating the deduction for both the cooperative entity and its individual members, ensuring a framework was in place while more permanent regulations were developed.

Deduction Calculation for Cooperatives

A specified agricultural or horticultural cooperative is eligible for a deduction based on the income it derives from business activities conducted with or for its patrons. The cooperative’s deduction is the lesser of two amounts. The first is 9% of the cooperative’s net income from its agricultural or horticultural business conducted with or for its patrons.

The second amount in the calculation is 50% of the W-2 wages paid by the cooperative that are properly allocable to its domestic production gross receipts. The cooperative must compare these two figures and take the smaller amount as its potential deduction.

The cooperative has the discretion to pass through all, some, or none of this calculated deduction to its patrons. This decision directly impacts the tax situation of both the cooperative and its members. If the cooperative retains the deduction, it reduces its own taxable income. If it passes the deduction through, the benefit shifts to the patrons. This decision must be communicated clearly to patrons, as it affects their own tax calculations.

Deduction Calculation for Patrons

Patrons of cooperatives, who are often individuals, trusts, or estates, may be eligible for the 20% QBI deduction on their qualified business income. This includes income received from a cooperative. However, IRS Notice 2018-59 and subsequent regulations established a specific rule that requires these patrons to reduce their standard QBI deduction. This adjustment is mandatory for patrons of specified agricultural and horticultural cooperatives.

The patron must decrease their 20% QBI deduction by a specific amount related to their cooperative income. This reduction is calculated as the lesser of two figures. The first is 9% of the qualified business income the patron receives from the cooperative.

The second figure for the reduction calculation is 50% of the patron’s allocable share of the W-2 wages paid by the cooperative. The patron then compares the 9% of QBI figure with the 50% of allocable wages figure and uses the smaller amount as the required reduction to their overall QBI deduction.

This reduction applies to the patron’s QBI deduction regardless of the cooperative’s actions. Even if the cooperative chooses not to pass through any of its own deduction, the patron must still perform this calculation and reduce their personal QBI deduction. This rule prevents a potential double benefit. The patron’s final QBI deduction is therefore the initial 20% calculation less this mandatory reduction.

Cooperative Reporting Requirements

To facilitate the correct tax calculations for patrons, cooperatives have specific reporting obligations. Notice 2018-59 clarified that a cooperative must provide its patrons with all the necessary information to accurately compute their individual QBI deductions. This information is a required attachment to the Form 1099-PATR, Taxable Distributions Received From Cooperatives, which patrons receive annually.

When a cooperative decides to pass through any portion of its deduction, it must explicitly notify the patron of the amount. This notification must clearly state the value of the deduction being passed through. This allows the patron to properly account for this benefit on their own tax return.

The reporting requirements extend beyond just the passed-through deduction amount. The cooperative must also inform the patron of their share of qualified business income and W-2 wages related to the patronage payments. This information is necessary for the patron to calculate the mandatory reduction to their personal QBI deduction.