On March 23, the Consolidated Appropriations Act (the “Appropriations Act”) was signed into law by President Trump. Included in the Appropriations Act were certain tax law provisions, including technical corrections to the partnership audit rules, increases in the availability of the low income tax credit, and the correction of what many commentators referred to as the “grain glitch” in Section 199A.
Section 199A, the so called QBI or 20% pass-through deduction (the “QBI deduction”), was introduced in the 2017 tax act. The QBI deduction is effective for tax years beginning after December 31, 2017, and before January 1, 2026. The QBI deduction is complicated, but generally speaking, allows any taxpayer other than a C Corporation to deduct 20% of its qualified business income, and as relevant here, 20% of its qualified REIT dividends, qualified cooperative dividends, and qualified publicly traded partnership income. The QBI deduction is subject to many limitations not discussed here.
As enacted, the QBI deduction was criticized for favoring farmers that sold to cooperatives instead of private companies. Under Section 199A, qualified business income is calculated on a net basis whereas cooperative dividends are calculated on a gross basis. This meant that farmers that sold to cooperatives could deduct 20% of gross sales as opposed to 20% of net income. According to lawmakers, this was an unintended mistake.
The Appropriations Act addressed this criticism by repealing the special deduction for qualified cooperative dividends. It also repeals the exclusion of cooperative dividends from the calculation of qualified business income.
Authored byRandall D. McClanahan