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Understanding the Domestic Production Activities Deduction

By Nichole Gouldie, Communications Specialist

Through a requested IRS Private Letter Ruling (PLR), MKC has found a path to pass a significant tax deduction on to the producers who are members through the Domestic Production Activities Deduction (DPAD).

 

“I was very excited when MKC contacted me regarding the cooperative’s willingness to set up the Domestic Production Activities Deduction to give this great benefit to their members,” said Jim Graber, CPA at Graber Accounting. “Right away I saw a potential of several million dollars of tax deduction to farmers.”

 

DPAD, often referred to as Section 199 Deduction, is a special federal income tax provision allowing a cooperative to allocate to its members a tax deduction generated by “qualified production activities.” As outlined by the Internal Revenue Service, and as it relates to the DPAD, grain payments the cooperative makes to its members are considered qualified production activities by the cooperative, thus making the cooperative and its members eligible for the tax deduction.

“As of the first of the year, MKC has initiated a plan to fully capture the value of the Domestic Production Activities Deduction for our members,” said CJ Blew, MKC board chairperson. “This project further enhances the value of the cooperative to its members.”

The favorable ruling will allow the partnered cooperatives within Team Marketing Alliance, Inc. to utilize a $5M deduction previously not available to the cooperatives or their members. The ruling, which will require specific process and documentation changes by TMA and the partnered cooperatives, will have a significant financial impact on their local communities and members.

“Economic value of this kind of cash savings being injected into the local economy is a real boost for the area,” Graber said.

DPAD is a tax deduction established to benefit the U.S. manufacturers and oil companies for domestic production. “Farmers are domestic producers as well. They are eligible for the tax deduction even though it is missed on many tax returns,” Graber said.

With the danger of oversimplifying what the deduction is and how it works, Graber explains it to his clients as an extra deduction that equals 9% of profit from domestic production.

Similar to patronage, this deduction will be shared by members based on the amount of grain business each member does with the cooperative. “Another benefit that separates your cooperative from other competition,” Blew said.

Once the Domestic Production Activities Deduction is calculated by each individual cooperative, the cooperative is allowed to pass through the deduction to its members. Once reported to the members on a 1099 Tax Form, the member will be allowed to utilize the deduction on their personal or corporate income tax return.

Graber has personally seen the deduction save up to $10,000 on an individual tax return. He said most farmers he sees could see a savings of $1,000 to $6,000.

According to Graber, there are no disadvantages of DPAD to the members of MKC. “It doesn’t decrease dividends, it doesn’t cost any extra in products,” he said. “It is simply a win-win situation.”

“I have found over the past 40 years as a public accountant, some of the worst tax advice comes from the coffee shops, church parking lots and family,” Graber said. “Before you dismiss this golden opportunity for a tax deduction on the coffee shop chatter, seek the advice of a competent professional. It is a great deal.”

Writer’s note: The views in this article are not intended to replace the advice of your tax professional. MKC encourages members to address questions to their tax professional or accountant.