MFA to allocate tax deduction to members in 2014
Special tax considerations this year. Tax rulings affect reporting of grain purchases for 2013
In September, MFA’s board of directors determined that a significant tax deduction would be passed through to benefit members on their 2014 income tax returns.
The tax deduction is known as the Domestic Production Activities Deduction, or commonly referred to as DPAD or Sec. 199 deduction. The DPAD deduction was created to provide tax benefits to companies or individuals that manufacture, mine or produce products in the United States. Agricultural cooperatives are allowed to treat products produced by their members as being manufacturing activities of the co-op for purposes of this deduction.
As a grain marketing agricultural cooperative, MFA has the unique ability to either deduct the DPAD on our corporate income tax return, or pass through this deduction to members that sell grain to MFA. This determination is made on a year-to-year basis.
The DPAD deduction has been around for a while, but recent IRS tax rulings have greatly increased the amount of the deduction for cooperatives that purchase grain from their members. The basis of these rulings is that grain purchased from members of cooperatives should be classified as per-unit retains rather than grain-sale proceeds. The IRS has ruled consistently that even though cooperatives have not historically treated grain proceeds as per-unit retains, grain purchases from members technically meet the definition of per-unit retains and should be treated as such in the future.
2013 tax year: 1099-PATR reporting of per-unit retains to members
One of the consequences of these tax rulings is that the IRS considers grain purchases from members of cooperatives to be per-unit retains for all purposes, including 1099 reporting. As such, MFA is required to report the dollar amount of grain purchases annually on Form 1099-PATR to members and the IRS. For 2013, MFA will report the gross amount of grain purchased from members on substitute 1099-PATR forms. The amount will be reported in Box 3 of the form with the description “Grain Sold to MFA as Per Unit Retains” and represents the gross proceeds from grain sold to MFA during the 2013 calendar year. It is important to distinguish the “gross” amount reported on the 1099 from the “net” amount that members received when selling their grain. The “gross” amount is the amount paid for the grain before reductions for items such as storage charges, drying charges and grain assessments.
In prior years, farmers may have been reporting the “net” amount received from MFA as gross income on their tax returns. For taxpayers that file Schedule F in 2013, the amount reported on Form 1099-PATR, Box 3 (Per-Unit Retains) should be reported on lines 3a and 3b of that form. If your grain settlement checks were reduced for storage charges, grain assessments, etc., be sure to include these amounts as separate deductions on your tax return.
If you aren’t filing Schedule F, you should consult with your tax preparer to determine where the per-unit retain amount should be reported on your return. It will be important to report the per-unit retain amount from your 1099 on the proper line of your tax return, as the IRS will attempt to match the amount on your return to the amounts reported on the 1099’s. If not reported correctly, you may receive a matching notice from the IRS.
2014 Tax Year: DPAD Allocation to Members
MFA will compute the DPAD deduction based on production activities occurring during our tax year ended Aug. 31, 2013. Those production activities include grain that is produced by our members and sold to MFA elevators during our tax year ended Aug. 31, 2013. After the deduction has been computed, MFA will allocate the deduction to customers based on their grain sales to MFA during our fiscal 2013 year. Members will receive a letter before May 15, 2014 indicating the amount of the deduction being passed through to them in 2014.
It is important to remember that this tax deduction will be deductible on the member’s 2014 income tax return, even though it relates to grain sold to MFA during our 2013 fiscal year. This treatment is consistent with the payment of the patronage dividend for our year ended Aug. 31, 2013 which was paid in January, 2014 and taxable to patrons in 2014. In addition to the notification letters, members will receive a substitute Form 1099-PATR for 2014 that shows the amount of the DPAD deduction that was allocated to them.
Joe Farmer is a cash basis taxpayer and reports his farm income on Schedule F when filing his 2013 income tax return. He sells 10,000 bushels of corn to MFA on Jan. 31, 2013 for $4 per bushel. He delivered the corn in November, 2012 and put it into storage at the elevator. Joe’s grain check was computed as follows:
Gross Proceeds from Sale
of 10,000 Bushels Corn $40,000
Storage Charges (1,000)
Corn Assessment (50)
Net Grain Check $38,950
This is the only business Joe did with MFA during 2013, so Joe will receive a 1099-PATR from MFA for 2013 showing per-unit retains of $40,000. Joe should report this $40,000 amount on lines 3a and 3b of Schedule F when filing his 2013 income tax return. The storage charges and corn assessment that were deducted from his grain check should be reported on the appropriate lines under Part II of Schedule F as farm expenses. In April, 2014, Joe will receive a notification letter from MFA stating that he is being allocated a DPAD deduction of $1,250 relating to his grain sales to MFA during the fiscal year ended Aug. 31, 2013. Joe will also receive a 1099-PATR from MFA for 2014 that shows the $1,250 DPAD deduction allocated to him. Joe can deduct the $1,250 DPAD on his 2014 income tax return by reporting it on Form 8903.
For 2014, MFA’s management and board of directors agree that passing through the DPAD deduction to members would be a greater benefit to our membership than taking the deduction at the corporate level. If the DPAD (estimated to be in excess of $5 million) is deducted on MFA’s corporate tax return, it could reduce or eliminate the patronage refund amount that is paid to members. To learn more about the benefits of the DPAD deduction and reporting of grain purchases as per-unit retains, MFA encourages members to consult with their tax preparers or accountants.
Kevin Luetkemeyer is tax manager for MFA Incorporated.
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