NSAC Tax Committee: Qualified Payment Letter to IRS 12-20-2019

Published on December 28, 2019

December 20, 2019
CC:PA:LPD:PR (REG-118425-18)
Room 5203
Internal Revenue Service
P.O. Box 7604
Ben Franklin Station
Washington, DC 20044 

Dear Sirs and Madams:

The National Society of Accountants for Cooperatives (NSAC) is a professional society comprised of accountants who are actively involved with the financial management and planning of cooperative businesses. NSAC members are either employed by cooperatives or provide professional services for cooperatives.

The members of NSAC would like to comment on an important issue relating to the proposed regulations under section 199A: The reporting and definitional issues surrounding qualified payments. This issue is of special concern to cooperatives and their advisors because of upcoming reporting deadlines. Cooperatives will be providing Form 1099-PATRs to their patrons no later than January 31, 2020, in accordance with applicable law, and part of that reporting includes the information for Box 7.

Section 199A(g)(1)(E) provides that a “qualified payment” is “an amount which . . . (iii) is attributable to qualified production activities income with respect to which a deduction is allowed to such cooperative under paragraph (1)” (emphasis added). The proposed regulations require a cooperative to report these qualified payments on Form 1099-PATR and the IRS has added Box 7 “qualified payments” to the 1099-PATR for 2019.

Many cooperatives’ section 199A(g) deduction will be limited by W-2 wages. The final regulations should clarify that the amount of the qualified payment that “is attributable to qualified production activities income with respect to which a deduction is allowed to such cooperative under paragraph (1)” may be less than the total Patronage Dividend and Per Unit Retain amounts paid to patrons if the W-2 wage limitation applies to the cooperative’s 199A(g) deduction.

For example, assume that a cooperative’s QPAI and taxable income are both $150 million and that is remitted to patrons as patronage dividends and Per-Unit Retain Allocations during the payment period. Also assume the cooperative has $9 million of attributable wages. Without a wage limitation, the cooperative’s section 199A(g) deduction would be $13.5 million (9 percent of $150 million). Because of the wage limitation, the section 199A(g) deduction is $4.5 million (50 percent of $9 million). Treasury regulations should provide that, in this case, two thirds ($4.5 million/$13.5 million) of the patronage dividends and per-unit retain allocations are “qualified payments” because this is the amount “with respect to which a deduction is allowed” to the cooperative. Thus, a cooperative would report to patrons, $100 million of qualified payments.

We believe that this interpretation is appropriate because it gives meaning to the language “is attributable to qualified production activities income with respect to which a deduction is allowed to such cooperative under paragraph (1)”. Congress provided these words to section 199A(g) for a reason. If Congress intended that cooperatives are required to report all of their Patronage and Per-Unit Retain payments to their patrons, the italicized words would be unnecessary.

In addition, many cooperatives have fiscal year ends, yet the Form 1099-PATR requires them to report calendar year payments. As a result, guidance is needed on how to allocate qualified payments between various patrons (i.e., FIFO or pro rata; and how cooperatives should report patronage dividends that are not paid until well after the following calendar year).

Given the uncertainty surrounding the definition and complexity for fiscal year cooperatives we recommend that the IRS issue a notice to exempt Specified Cooperatives from 2019 1099-PATR Box 7 reporting requirements similar to the recently released Notice 2019-66.  Thank you for your timely attention to this issue. Please feel free to reach out to us directly should you have questions or comments.


Rebecca Smith, CPA

Chair, NSAC Tax Committee



Eric Krienert, CPA

Vice-Chair, NSAC Tax Committee

Michael E. Fincher, CPA
Vice-Chairman, NSAC Tax Committee