5544 Federal Register / Vol. 86, No. 11 / Tuesday, January 19, 2021 / Rules and Regulations 

DEPARTMENT OF THE TREASURY 

Internal Revenue Service 

26 CFR Part 1 

[TD 9947] 

RIN 1545–B090 

Section 199A Rules for Cooperatives 

and Their Patrons 

AGENCY: Internal Revenue Service (IRS), 

Treasury. 

ACTION: Final regulations and removal of 

final and temporary regulations. 

SUMMARY: This document contains final 

regulations that provide guidance to 

cooperatives to which sections 1381 

through 1388 of the Internal Revenue 

Code (Code) apply (Cooperatives) and 

their patrons regarding the deduction 

provided by section 199A(a) of the Code 

for qualified business income (QBI), as 

well as guidance to specified 

agricultural or horticultural 

cooperatives (Specified Cooperatives) 

and their patrons regarding the 

deduction provided by section 199A(g) 

of the Code for eligible domestic 

production activities undertaken by 

Specified Cooperatives. The final 

regulations also provide guidance on 

section 199A(b)(7), the statutory rule 

requiring patrons of Specified 

Cooperatives to reduce their QBI 

deduction under section 199A(a). In 

addition, the final regulations include a 

definition of patronage and 

nonpatronage sourced items under 

section 1388 of the Code, and revise 

existing regulations under section 1382 

of the Code to reference this definition. 

Finally, this document removes the final 

and temporary regulations under former 

section 199. These final regulations 

affect Cooperatives as well as patrons 

that are individuals, partnerships, S 

corporations, trusts, and estates engaged 

in domestic trades or businesses. 

DATES: 

Effective date: These regulations are 

effective on January 14, 2021. 

Applicability dates: For dates of 

applicability, see §§ 1.199A–7(h), 

1.199A–8(h), 1.199A–9(k), 1.199A–10(i), 

1.199A–11(h), 1.199A–12(j), 1.1382– 

3(e), and 1.1388–1(g). 

FOR FURTHER INFORMATION CONTACT: 

Jason Deirmenjian at (202) 317–4470 

(not a toll-free number). 

SUPPLEMENTARY INFORMATION: 

Background 

This document contains amendments 

to the Income Tax Regulations (26 CFR 

part 1) under sections 199A, 1382, and 

1388 of the Code. 

Section 199A was enacted on 

December 22, 2017, by section 11011 of 

Public Law 115–97, 131 Stat. 2054, 

2063, commonly referred to as the Tax 

Cuts and Jobs Act (TCJA). Parts of 

section 199A were amended on March 

23, 2018, effective as if included in the 

TCJA, by section 101 of Division T of 

the Consolidated Appropriations Act, 

2018, Public Law 115–141, 132 Stat. 

348, 1151 (2018 Act). Section 199A 

applies to taxable years beginning after 

2017 and before 2026. Unless otherwise 

indicated, all references to section 199A 

are to section 199A as amended by the 

2018 Act. 

In addition, section 13305 of the TCJA 

repealed section 199 (former section 

199), which provided a deduction for 

income attributable to domestic 

production activities (section 199 

deduction). Public Law 115–97, 131 

Stat. 2054, 2126. The repeal of former 

section 199 is effective for all taxable 

years beginning after 2017. 

Section 199A(a) provides taxpayers a 

deduction of up to 20 percent of QBI 

from a domestic business operated as a 

sole proprietorship or through a 

partnership, S corporation, trust, or 

estate, and up to 20 percent of qualified 

real estate investment trust (REIT) 

dividends and publicly traded 

partnership (PTP) income (section 

199A(a) deduction). Section 199A(b)(7) 

requires patrons of Specified 

Cooperatives to reduce their section 

199A(a) deduction if those patrons 

receive certain payments from Specified 

Cooperatives. 

Section 199A(g) provides a deduction 

for Specified Cooperatives and their 

patrons (section 199A(g) deduction) that 

is based on the former section 199 

deduction. Section 199A(g)(4)(A) 

defines a Specified Cooperative, in part, 

as an organization to which part I of 

subchapter T of chapter 1 of the Code 

(subchapter T) applies. Under section 

1381(a)(2), subchapter T applies to any 

corporation operating on a cooperative 

basis, with certain exceptions not 

relevant here. Section 1382 provides 

rules regarding the taxable income of 

Cooperatives and section 1388 provides 

definitions applicable for purposes of 

subchapter T. 

The Department of the Treasury 

(Treasury Department) and the IRS 

published proposed regulations (REG– 

107892–18) providing guidance on the 

section 199A(a) deduction in the 

Federal Register (83 FR 40884) on 

August 16, 2018. A second notice of 

proposed rulemaking providing 

guidance (REG–134652–18) and final 

regulations implementing the section 

199A(a) deduction (TD 9847) were 

published in the Federal Register (84 

FR 3015 and 84 FR 2952, respectively) 

on February 8, 2019, with corrections to 

TD 9847 published in the Federal 

Register (84 FR 15954) on April 17, 

2019. TD 9847, which promulgated 

§§ 1.199A–1 through 1.199A–6 to 

implement the section 199A(a) 

deduction, does not include all the rules 

needed for patrons of Cooperatives to 

calculate their particular section 

199A(a) deductions. Specifically, the 

rules included in TD 9847 do not 

address patrons’ treatment of payments 

received from Cooperatives for purposes 

of section 199A(a) or the section 

199A(g) deduction for Specified 

Cooperatives, though § 1.199A–1(e)(7) 

restates the reduction to a patron’s 

section 199A(a) deduction required 

under section 199A(b)(7). 

To address these matters, on June 19, 

2019, the Treasury Department and the 

IRS published a notice of proposed 

rulemaking (REG–118425–18) in the 

Federal Register (84 FR 28668) 

containing proposed regulations under 

sections 199A and 1388, with 

corrections published in the Federal 

Register (84 FR 38148) on August 6, 

2019 (together, Proposed Regulations). 

The Proposed Regulations set forth rules 

to address patrons’ treatment of 

payments received from Cooperatives 

for purposes of section 199A(a) and the 

section 199A(g) deduction for Specified 

Cooperatives in proposed §§ 1.199A–7 

through 1.199A–12, as well as proposed 

rules under section 1388 regarding 

patronage and nonpatronage sources of 

income of Cooperatives. The Proposed 

Regulations also withdrew all proposed 

regulations issued under former section 

199 that had not been finalized and 

proposed to remove the final and 

temporary regulations under former 

section 199. 

The Summary of Comments and 

Explanation of Revisions of the final 

regulations summarizes the provisions 

of the Proposed Regulations, which are 

explained in greater detail in the 

preamble to the Proposed Regulations. 

After full consideration of the comments 

received on the Proposed Regulations, 

this Treasury decision adopts the 

Proposed Regulations with 

modifications in response to such 

comments as described in the Summary 

of Comments and Explanation of 

Revisions. 

Summary of Comments and 

Explanation of Revisions 

The purpose and scope of the final 

regulations is limited to providing 

guidance regarding the application of 

sections 199A(a), 199A(b)(7), 199A(g), 

1382, and 1388. Section 199A(a) is 

generally applicable to patrons of all 


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Cooperatives, whereas sections 

199A(b)(7) and 199A(g) apply only to 

Specified Cooperatives and their 

patrons. Section 1388 generally applies 

to all Cooperatives and their patrons. 

The Treasury Department and the IRS 

received written comment submissions 

in response to the Proposed Regulations. 

All comments were considered and are 

available at www.regulations.gov or 

upon request. Most of the comments 

addressing the Proposed Regulations are 

summarized in this Summary of 

Comments and Explanation of 

Revisions. However, comments merely 

summarizing or interpreting the 

Proposed Regulations, recommending 

statutory revisions, or addressing issues 

which are outside the scope of the final 

regulations are not discussed in this 

Summary of Comments and Explanation 

of Revisions. 

Commenters requested that the rules 

for section 199A as they apply to 

Cooperatives and patrons be simplified 

and clarified. Accordingly, while the 

final regulations adopt many of the rules 

described in the Proposed Regulations, 

they are revised in response to the 

comments received. Additionally, in 

response to the comments, the final 

regulations include clarifying language 

and additional examples. 

Parts I through VII of this Summary of 

Comments and Explanation of Revisions 

discuss §§ 1.199A–7 through 1.199A– 

12, 1.1382–3, and 1.1388–1, 

respectively. Part VIII addresses the 

removal of all final and temporary 

regulations issued under former section 

199. Part IX addresses comments on the 

proposed applicability date and the 

transition rule. 

I. § 1.199A–7, Rules for Patrons of 

Cooperatives 

A. In General 

As noted in the Background, the 

section 199A(a) deduction allows 

taxpayers to deduct up to 20 percent of 

QBI from a domestic business operated 

as a sole proprietorship or through a 

partnership, S corporation, trust, or 

estate, and up to 20 percent of qualified 

REIT dividends and PTP income. 

Patrons that are individuals (as 

described in § 1.199A–1(a)(2)) are 

eligible for the section 199A(a) 

deduction. If patrons receive certain 

payments from Specified Cooperatives, 

then section 199A(b)(7) requires them to 

calculate a reduction to their section 

199A(a) deduction. This part I.A 

provides a general outline of the rules 

of proposed § 1.199A–7, and the 

remainder of this part I addresses the 

specific comments received on 

proposed § 1.199A–7. Other than for 

modifications made in response to 

specific comments, the final regulations 

generally adopt the Proposed 

Regulations. 

Proposed § 1.199A–7(a) provides 

special rules and definitions for patrons 

of cooperatives in applying §§ 1.199A– 

1 through –6, including definitions of 

patron, patronage and nonpatronage, 

qualified payment, and Specified 

Cooperative. Proposed § 1.199A–7(b) 

explains that patronage dividends or 

similar payments that a patron receives 

from a Cooperative are considered as 

generated from the trade or business the 

Cooperative conducts on behalf of the 

patron, and are therefore tested by the 

Cooperative at its trade or business 

level. Proposed § 1.199A–7(c) provides 

special rules for patrons and 

Cooperatives relating to the definition of 

QBI, the determination of QBI by 

patrons, and the determination and 

reporting by Cooperatives of the amount 

of qualified items of income, gain, 

deduction, and loss (collectively, 

qualified items) for qualified trades or 

businesses in distributions made to 

patrons. Proposed § 1.199A–7(d) 

provides special rules for patrons’ 

determinations of specified service 

trades or businesses (SSTBs) and for 

Cooperatives’ determination and 

reporting of SSTBs. 

Under proposed § 1.199A–7(c)(3) and 

(d)(3), Cooperatives are required to 

report the amount of qualified items 

related to non-SSTBs and SSTBs in 

distributions made to patrons on an 

attachment to or on the Form 1099– 

PATR (or any successor form), unless 

the form instructions provide otherwise. 

Under proposed § 1.199A–7(c)(3), if a 

Cooperative fails to report the amount of 

qualified items from its non-SSTBs, 

then the amount of distributions from 

the Cooperative that may be included in 

the patron’s QBI is presumed to be zero. 

Under proposed § 1.199A–7(d)(3), if a 

Cooperative fails to report the amount of 

qualified items from an SSTB (SSTB 

items), then only the amount of 

qualified items the Cooperative reports 

under proposed § 1.199A–7(c)(3) may be 

included in the patron’s QBI, and the 

remaining amount of distributions from 

the Cooperative is presumed to not be 

included in the patron’s QBI. 

Proposed § 1.199A–7(e) provides 

special rules for patrons relating to the 

statutory limitations based on W–2 

wages and unadjusted basis 

immediately after acquisition (UBIA) of 

qualified property. The Proposed 

Regulations provide that Cooperatives 

do not allocate their W–2 wages and 

UBIA of qualified property to patrons, 

and directs patrons to calculate the W– 

2 wage and UBIA of qualified property 

limitations at the patron level when 

calculating their section 199A(a) 

deduction. 

Proposed § 1.199A–7(f) provides 

special rules for Specified Cooperatives 

and their patrons relating to calculating 

the section 199A(b)(7) reduction, 

including a requirement that 

Cooperatives report the amount of 

qualified payments (as defined in 

proposed § 1.199A–8(d)(2)(ii)) made to 

patrons on an attachment to or on the 

Form 1099–PATR (or any successor 

form). Proposed § 1.199A–7(g) provides 

examples that illustrate the rules in 

§ 1.199A–7(a) through (f) for Specified 

Cooperatives and their patrons. 

Lastly, proposed § 1.199A–7(h) 

generally provides that taxpayers may 

rely on the proposed rules in their 

entirety and as applied in a consistent 

manner until final regulations are 

published in the Federal Register. 

Proposed § 1.199A–7(h) also includes 

the transition rule relating to the repeal 

of the former section 199 deduction and 

the implementation of the new section 

199A(a) deduction. 

B. Comments Related to Proposed 

§§ 1.199A–7(c)(3) and (d)(3) 

i. Requirements That Cooperative 

Determines Qualified Items From NonSSTBs and Qualified Items From SSTBs 

Under proposed §§ 1.199A–7(c)(3) 

and (d)(3), Cooperatives must separately 

determine the amounts of qualified 

items relating to non-SSTBs and 

qualified items relating to SSTBs in 

distributions made to patrons. 

Commenters asserted that whether 

income is a qualified item when earned 

at the Cooperative level should not be 

determinative of its treatment at the 

patron level, but that instead the 

determination of qualified items from 

non-SSTBs and SSTBs should be made 

by the patron based solely on whether 

a patronage dividend relates to a 

patron’s trade or business. These 

commenters additionally asserted that 

the proposed rules burden Cooperatives 

by requiring additional information 

reporting and are not consistent with 

the provisions of subchapter T. 

The final regulations do not adopt the 

commenters’ suggestion for several 

reasons, including that the proposal 

does not comport with sections 

199A(c)(3) and (d)(2). The rules of 

proposed §§ 1.199A–7(c)(3) and (d)(3) 

are consistent with the rules in TD 9847 

implementing the section 199A(a) 

deduction generally. These rules arise 

from the statutory requirement that all 

items in the computation of the section 

199A(a) deduction be qualified items as 

defined in section 199A(c)(3) and not 


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5546 Federal Register / Vol. 86, No. 11 / Tuesday, January 19, 2021 / Rules and Regulations 

derived from an SSTB as defined in 

section 199A(d)(2). TD 9847 generally 

provides that an item of income, gain, 

deduction and loss is determined and 

reported for each trade or business by 

the entity or individual that directly 

conducts the trade or business. 

Patronage dividends and similar 

payments are considered to be directly 

generated from the trade or business 

that the Cooperative conducts on behalf 

of or with its patrons. For example, an 

individual patron must determine QBI 

for each trade or business it directly 

conducts. To the extent a patron 

receives patronage dividends or similar 

payments from a Cooperative, such 

patronage dividends or similar 

payments are considered generated from 

the trade or business the Cooperative 

conducts on behalf of or with its patron 

and are tested by the Cooperative at the 

level of its trade or business. 

Failure to determine whether items of 

income, gain, deduction, and loss that 

are distributed to patrons are qualified 

items at the Cooperative level could 

result in patrons’ circumvention of the 

statutory requirements for qualified 

items under section 199A(c)(3)(A) and 

(B), for example, that items be 

effectively connected with the conduct 

of a trade or business within the United 

States. Section 199A(c)(3)(B) lists items 

that are not treated as qualified items 

defined in section 199A(c)(3). All 

dividends, income equivalent to 

dividends, or payments in lieu of 

dividends described in section 

954(c)(1)(G) are not qualified items. 

However, section 199A(c)(3)(B)(ii) also 

specifically provides that patronage 

dividends are not treated as dividends, 

income equivalent to dividends, or 

payments in lieu of dividends described 

in section 954(c)(1)(G), which means a 

patronage dividend can be taken into 

account as a qualified item to the extent 

otherwise qualified. The Joint 

Committee on Taxation report titled 

‘‘Technical Explanation of the Revenue 

Provisions of the House Amendment to 

the Senate Amendment to H.R. 1625 

(Rules Committee Print 115–66)’’ (JCX– 

6–18, released March 22, 2018) (Joint 

Committee Report) further clarified that 

other similar amounts received from 

Cooperatives can be included in QBI, 

provided those amounts are otherwise a 

qualified item. Joint Committee on 

Taxation, JCX–6–18, Technical 

Explanation of the Revenue Provisions 

of the House Amendment to the Senate 

Amendment to H.R. 1625 (Rules 

Committee Print 115–66) 25 (March 22, 

2018). As a result, the Proposed 

Regulations define a qualified item as 

including a distribution for which a 

Cooperative is allowed a deduction 

under section 1382(b) or (c)(2) 

(including patronage dividends and 

other similar payments, such as money, 

property, qualified written notices of 

allocation, and qualified per-unit retain 

certificates, as well as money or 

property paid in redemption of a 

nonqualified written notice of 

allocation), provided the distribution is 

otherwise a qualified item. Therefore, to 

be a qualified item under section 

199A(c)(3), patronage dividends and 

other similar payments must still be 

effectively connected (section 

199A(c)(3)(A)(i)), included or allowed in 

income (section 199A(c)(3)(A)(ii)), and 

not represent amounts described in 

section 199A(c)(3)(B)(i) and (iii)–(vii). 

Additionally, items of income, gain, 

deduction, and loss from an SSTB are 

not includable in QBI with respect to 

individuals above the threshold amount 

and subject to the phase-in range under 

section 199A(d)(3). Any potential 

burden to the Cooperatives in making 

these determinations is outweighed by 

the patrons’ need for this information to 

determine their section 199A(a) 

deduction. 

Based upon these statutory 

requirements and because the 

Cooperative is better positioned than a 

patron to determine whether a 

patronage dividend or other similar 

payment is a qualified item as 

determined under the rules of 

§ 199A(c)(3) and § 1.199A–3(b) and 

whether it is derived from an SSTB as 

defined in § 199A(d)(2) and § 1.199A–5, 

these determination rules are adopted in 

the final regulations without substantive 

change. The patron then determines if 

the qualified item is includible in the 

patron’s QBI under § 1.199A–7(c)(2) and 

whether the qualified item from the 

SSTB is includible in the patron’s QBI 

based on the threshold rules in 

§ 199A(d)(3) and § 1.199A–5(a)(2)). 

There is no duplication in effort 

between the Cooperative and the patron 

with respect to these determinations. 

However, in response to commenters, 

the reporting requirements of 

Cooperatives have been modified to 

balance the burden on the Cooperatives 

and the patrons’ need to receive 

information to determine their section 

199A(a) deduction. 

ii. Requirements That Cooperative 

Report Qualified Items From NonSSTBs, Qualified Items From SSTBs, 

and Qualified Payments 

Proposed §§ 1.199A–7(c)(3), (d)(3), 

and (f)(3) require Cooperatives to report 

qualified items from non-SSTBs, 

qualified items from SSTBs, and 

qualified payments (qualified payments 

are relevant only for Specified 

Cooperatives) to patrons. A commenter 

opposed these reporting requirements 

on the grounds that the requirements 

did not exist under former section 199 

and do not exist under section 6044(b). 

In the commenter’s view, Congress 

would have amended section 6044 to 

that effect if the reporting requirements 

were intended. The Treasury 

Department and the IRS agree that 

versions of Form 1099–PATR prior to 

the enactment of section 199A did not 

include a box for qualified payments 

and that section 6044(b) does not 

require reporting of these amounts. 

However, unlike former section 199, 

information concerning all of these 

amounts (qualified payments as 

applicable) are required for a patron to 

calculate its section 199A(a) deduction, 

including the reduction under section 

199A(b)(7) for patrons of Specified 

Cooperatives, which did not exist under 

former section 199. Therefore, it is 

necessary for patrons to have this 

information, and it is most efficient for 

patrons to receive the information from 

Cooperatives on Form 1099–PATR (or 

any successor form). Additionally, 

section 199A(f)(4) authorizes the 

Treasury Department and the IRS to 

prescribe such regulations as are 

necessary to carry out the purposes of 

section 199A, including reporting 

requirements. 

The commenter also requested 

removal of these reporting requirements 

on the grounds that Cooperatives should 

not be treated as relevant passthrough 

entities (RPEs). The Treasury 

Department and the IRS agree that 

Cooperatives are not RPEs. However, 

these reporting requirements emanate 

from the statutory requirements of 

section 199A and not the nature of the 

entities. These reporting requirements 

are imposed on Cooperatives because 

sections 199A(c) and (d) require that 

items of income, gain, deduction, and 

loss be of a certain character and from 

a qualified trade or business when 

determining the section 199A(a) 

deduction, and patrons need this 

information to determine their section 

199A(a) deduction. Further, the 

reporting requirements applicable to 

Cooperatives are distinguishable from 

those imposed on RPEs because RPEs 

are required to engage in more detailed 

reporting, including reporting W–2 

wages and UBIA of qualified property. 

After consideration of the comments, 

the final regulations maintain a 

reporting requirement for Cooperatives, 

but the rules in proposed § 1.199A– 

7(c)(3) and (d)(3) are revised to simplify 

the Cooperative’s reporting obligation 

with respect to qualified items from 


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non-SSTBs and qualified items from 

SSTBs. The proposed regulations 

required that the Cooperative report the 

amounts of qualified items with respect 

to each non-SSTB of the Cooperative, 

with a similar requirement for SSTBs. 

However, to reduce burden and clarify 

that Cooperatives do not make trade or 

business and corresponding aggregation 

determinations, the final regulations 

require the Cooperative to report the 

total net amount of qualified items from 

non-SSTBs in distributions to patrons 

without delineating these amounts 

business by business. A similar change 

was made to the reporting requirements 

for qualified items in distributions from 

SSTBs. Patrons then determine the 

extent that those payments are included 

in the QBI of the patrons’ trade or 

business. For example, a patron will 

determine whether those payments are 

related to the patron’s trade or business 

and whether any items in the SSTB 

distributions reported by the 

Cooperative are includible as qualified 

items of income, gain, deduction and 

loss at the patron’s level after 

consideration of the threshold and 

phase-in amounts as applied to the 

patron’s taxable income. In addition, the 

rules in proposed § 1.199A–7(b) are 

revised for consistency with the revision 

to proposed § 1.199A–7(c)(3) and (d)(3). 

Commenter also suggested that the 

SSTB reporting requirements be revised 

to reflect that if a Cooperative provides 

services from SSTBs to patrons, the 

services are provided to patrons, not 

third parties. Therefore, any patronage 

dividends should be deemed a rebate, 

which would increase QBI of the 

patrons to its proper amount. Further, if 

the SSTBs conducted by the 

Cooperatives relate to personal expenses 

of a patron, then the SSTB patronage 

dividends should be excluded from the 

QBI calculation, but done so at the 

patron level, because only the patron 

would know whether the SSTB service 

is a personal expense. 

Based on the commenter’s 

suggestions, the Treasury Department 

and the IRS considered whether 

additional rules were needed and 

concluded that revisions are necessary 

to resolve certain questions raised by 

the commenter. Consider an example 

where a Cooperative provides a service 

to patrons as part of an SSTB of the 

Cooperative under section 199A(d)(2). 

Assume that a patron’s use of that 

service is a deductible expense to its 

qualified trade or business. Patron pays 

the Cooperative $1,000 for the service. 

The Cooperative later pays the patron a 

patronage dividend of $50 related to the 

service. This patronage dividend is 

income under section 1385(a)(1) to the 

patron. Under the Proposed Regulations, 

assuming the patron’s income is over 

the threshold amount (defined in 

section 199A(e)(2)), the patron would 

not be able to include the $50 in its 

calculation of QBI because it is SSTB 

income. Meanwhile, the patron would 

have a $1,000 expense that would 

reduce QBI. In substance, however, the 

patron would have only paid $950 for 

the service. 

The Treasury Department and the IRS 

considered two approaches for resolving 

this asymmetry. One approach 

(suggested by a commenter) would 

permit a patron paying for services from 

an SSTB of the Cooperative for its trade 

or business to treat any patronage 

dividends related to those amounts as 

qualified items (or rebates that would 

reduce the expense), regardless of the 

threshold amounts, if the services were 

required or used in a qualified trade or 

business of the patron. A second 

approach would permit the allocation of 

part of the patron’s expense to the nonqualified SSTB income. To reach the 

correct result, this second approach 

would limit the allocation of the 

expense to the amount of SSTB income 

of the Cooperative that relates to the 

patron’s expense. Under the second 

approach, a patron could allocate 

expenses between its qualified trade or 

business income and the SSTB income 

up to the amount of the patronage 

dividend. Either approach reaches a 

similar end result with respect to the 

example—that is, the patron having a 

net $950 expense included within QBI. 

However, the first approach conflicts 

with section 199A(d)(2) in that SSTB 

income cannot be treated as QBI, unless 

the section 199A(d)(3) exception 

applies. The first approach also conflicts 

with section 1385(a)(1), which requires 

inclusion of patronage dividends in 

income, unless an exception is met 

under section 1385(b). In contrast, the 

second approach does not conflict with 

either the requirements of section 199A 

or section 1385(a)(1). Also, the 

commenter noted, the patron’s 

exception to income from patronage 

dividends for personal, living, or family 

items is met under section 1385(b)(2). 

For clarification in that case, the patron 

will have to make that determination, 

and none of the expense or patronage 

dividend should be taken into account 

for purposes of QBI. Based on this 

analysis, the final regulations in 

§ 1.199A–7(d)(3)(ii) adopt the second 

approach, and include an example 

illustrating the application of this 

approach. 

iii. Relief From Zero-Presumption Rule 

As discussed previously, if a 

Cooperative fails to timely report 

qualified items and SSTB items, 

proposed §§ 1.199A–7(c)(3) and (d)(3) 

provide that the amount of distributions 

from the Cooperative that may be 

included in the patron’s QBI is 

presumed to be zero (zero-presumption 

rule). Commenters requested relief from 

the zero-presumption rule on the basis 

that Cooperatives may not be aware of 

the reporting requirements and may 

negligently fail to issue Forms 1099– 

PATR in a timely manner. For tax year 

2019 filing, Cooperatives can report 

qualified payments on the Form 1099– 

PATR and can attach a supplemental 

schedule disclosing qualified items and 

SSTB items to patrons. For future filing 

years, the Form 1099–PATR will be 

updated to include boxes for qualified 

items and SSTB items. The final 

regulations do not provide relief from 

the zero-presumption rule, since the 

zero-presumption rule is a presumption 

that the patron may rebut with 

appropriate evidence or documentation. 

One example of appropriate evidence or 

documentation would be a corrected 

Form 1099–PATR received by the 

patron from the Cooperative. 

C. Comments Related to Proposed 

§ 1.199A–7(f), Special Rules for Patrons 

of Specified Cooperatives 

i. Requirement for Patrons To Compute 

the Section 199A(b)(7) Reduction 

The section 199A(b)(7) reduction is a 

statutory rule requiring, in the case of 

any qualified trade or business of a 

patron of a Specified Cooperative, that 

the amount determined under section 

199A(b)(2) with respect to the trade or 

business be reduced by the lesser of (A) 

9 percent of so much of the QBI with 

respect to the trade of business as is 

properly allocable to qualified payments 

(as defined in section 199A(g)(2)(E) and 

§ 1.199A–8(d)(2)(ii)), or (B) 50 percent of 

so much of the W–2 wages with respect 

to the trade or business as are so 

allocable. Proposed § 1.199A–7(f)(1) 

provides that a patron of a Specified 

Cooperative that receives a qualified 

payment must reduce its section 

199A(a) deduction as provided in 

§ 1.199A–1(e)(7) (which follows the 

language of section 199A(b)(7)), and the 

reduction applies whether the Specified 

Cooperative passes through all, some, or 

none of the Specified Cooperative’s 

section 199A(g) deduction to the patron 

in the taxable year. 

Commenters requested an opt-out 

provision whereby patrons and 

Specified Cooperatives could elect out 

of the rules under sections 199A(b)(7) 


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and (g). The final regulations do not 

adopt this request. There is no statutory 

provision providing for an opt-out of 

these Code sections. In the parallel 

situation under former section 199, 

there also was no opt-out provision. 

Specifically, the no-double-counting 

rule under former § 1.199–6(l) 

precluded farmers from including 

qualified payments in their own former 

section 199 deduction. Further, 

permitting patrons and Specified 

Cooperatives to elect out of the rules 

under sections 199A(b)(7) and (g) would 

be difficult to administer and could 

result in patrons and Specified 

Cooperatives taking conflicting 

positions. 

Some commenters have reasoned that 

turning off the section 199A(b)(7) 

reduction is justified based on the part 

of the qualified payment definition in 

section 199A(g)(2)(E)(iii), whereby the 

payment must be attributable to 

qualified production activities income 

(QPAI) with respect to which a 

deduction is allowed to the Specified 

Cooperative under section 199A(g)(1). 

However, section 199A(b)(7) applies 

when qualified payments are received 

by a patron in a qualified trade or 

business. The determination of whether 

a qualified payment was received is a 

different issue and is addressed in part 

II of this Summary of Comments and 

Explanation of Revisions. 

ii. Comments on Interaction of Section 

199A(b)(7) Reduction and § 1.199A–4 

Commenters requested clarification 

on how the section 199A(b)(7) reduction 

operates with the aggregation rules in 

§ 1.199A–4. In certain circumstances, an 

individual may aggregate two or more 

trades or businesses for purposes of the 

QBI component calculation in § 1.199A– 

1(d)(2)(iv), which includes application 

of the W–2 wage and UBIA of qualified 

property limitations under section 

199A(b)(2). Aggregation is permitted but 

not required. Once an individual 

chooses to aggregate two or more trades 

or businesses, the individual must 

consistently report the aggregated trades 

or businesses in all subsequent taxable 

years. As commenters point out, 

aggregation of two or more trades or 

businesses may be favored by a taxpayer 

because it may provide better results 

when applying the W–2 wage and UBIA 

of qualified property limitations. 

Commenters asked for clarification in 

two situations. First, commenters asked 

whether a patron who aggregates a 

rental real estate business and a farming 

business conducted with or through a 

Specified Cooperative may exclude the 

rental income from the section 

199A(b)(7) reduction. This question 

relates to clarifying the rule in proposed 

§ 1.199A–7(f)(2)(i), which provides that 

for purposes of calculating the section 

199A(b)(7) reduction, a patron must use 

a reasonable method based on all the 

facts and circumstances to allocate 

between income that is from qualified 

payments and income that is not from 

qualified payments. As a clarification, 

income that is not related to qualified 

payments can be earned in transactions 

that do not involve Specified 

Cooperatives, for example, a grain sale 

to a noncooperative customer. This 

means that the rental income, which is 

not income related to qualified 

payments, should be excluded when 

calculating the section 199A(b)(7) 

reduction for the aggregated trade or 

business. 

Second, commenters asked whether 

in that same situation a patron is 

permitted to allocate the rental expenses 

toward the income from the Specified 

Cooperative, thus possibly lowering the 

section 199A(b)(7) reduction. Proposed 

§ 1.199A–7(f)(2)(i) provides that for 

purposes of calculating the section 

199A(b)(7) reduction, a patron must use 

a reasonable method to allocate income 

items and related deductions. Thus, it 

would be reasonable to allocate that 

expense against qualified payments 

when calculating the section 199A(b)(7) 

reduction only to the extent the rental 

expense is related to the qualified 

payments from the Specified 

Cooperative. These aggregation 

principles are applied throughout the 

rules and examples of the final 

regulations and are consistent with the 

Proposed Regulations. 

Commenters also inquired as to how 

negative QBI allocable to qualified 

payments affects the section 199A(b)(7) 

reduction. The Treasury Department 

and the IRS considered this comment 

and determined that there would be no 

section 199A(b)(7) reduction in such a 

case. An example illustrating this is a 

farmer conducting two types of 

agricultural businesses (A and B). 

Assume the farmer treats A and B as one 

trade or business for purposes of the 

section 199A(a) deduction. The farmer 

conducts A with non-Specified 

Cooperatives and B through a Specified 

Cooperative. The farmer generates $100 

of qualifying income through A and 

receives $100 of qualifying income from 

a Specified Cooperative in B, all of 

which is also a qualified payment. The 

farmer has $180 of qualified expenses. 

For purposes of the section 199A(a) 

deduction, the farmer’s QBI ($20) from 

the trade or business is used to calculate 

the deduction, resulting in a $4 

deduction (assuming there is no 

limitation under section 199A(b)(2)(B)). 

The farmer then must determine if there 

is any section 199A(b)(7) reduction to 

this amount. The farmer reasonably 

allocates its qualified expenses under 

§ 1.199A–7(f)(2)(i) for purposes of 

calculating the section 199A(b)(7) 

reduction, and determines $110 of the 

qualified expenses are allocable to B 

(and $70 to A). The farmer will use only 

QBI from B to calculate the section 

199A(b)(7) reduction because that is the 

only QBI properly allocable to qualified 

payments. Farmer’s QBI for purposes of 

section 199A(b)(7)(A) is negative $10, 

resulting in a $0 section 199A(b)(7) 

reduction (regardless of W–2 wages 

under section 199A(b)(7)(B)). 

iii. Comments on Safe Harbor Allocation 

Method in Proposed § 1.199A–7(f)(2)(ii) 

Proposed § 1.199A–7(f)(2)(ii) is a safe 

harbor providing a reasonable method 

for patrons with income under the 

threshold amount (set forth in section 

199A(e)(2)) to allocate deductions and 

W–2 wages between income or gain 

related to qualified payments and 

income or gain that is not related to 

qualified payments when determining 

the section 199A(b)(7) reduction with 

respect to a patron’s qualified trade or 

business. The method allows patrons to 

apportion deductions and W–2 wages 

ratably between income related to 

qualified payments and income not 

related to qualified payments. This 

means, for example, that the amount of 

deductions in QBI allocable to qualified 

payments is equal to the proportion of 

the total deductions that the amount of 

income or gain related to qualified 

payments bears to total income or gain 

used to determine QBI. The same 

proportion also applies when 

determining the amount of W–2 wages 

allocable to the portion of the trade or 

business that received qualified 

payments. In addition to considering the 

specific comments concerning proposed 

§ 1.199A–7(f)(2)(ii) described in this 

preamble, revisions necessary to clarify 

the scope and application of the safe 

harbor were made in § 1.199A–7(f)(2)(ii) 

of the final regulations. 

Commenters requested clarification 

on whether QBI under the safe harbor 

allocation method in proposed 

§ 1.199A–7(f)(2)(ii) includes: Gross 

receipts from the sale of farm 

equipment, farm program payments 

(i.e., Conservation Reserve Program, 

Market Facilitation Program, Dairy 

Program, etc.), section 1245 recapture, 

and commonly owned rental income. 

One commenter recommended that 

gross receipts from the sale of 

equipment and machinery should be 

included in the calculation and 

allocated based on past depreciation (in 


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the case of section 1245 recapture), and 

that gross receipts from farm programs 

be considered not related to qualified 

payments. Another commenter 

recommended that both gains from 

section 1245 recapture, crop insurance 

receipts, government subsidy payments, 

and income from aggregated rental 

income under § 1.199A–4 be not 

allocable to qualified payments received 

from Specified Cooperatives for 

purposes of section 199A(b)(7). 

Section 199A(b)(7)(A) requires 

determining the QBI with respect to a 

trade or business that is properly 

allocable to qualified payments received 

from a Specified Cooperative, § 1.199A– 

7(f)(2)(i) requires a reasonable method 

be adopted for making this 

determination, and the safe harbor 

under § 1.199A–7(f)(2)(ii) allows patrons 

under the threshold amount to allocate 

the deductions and W–2 wages of a 

business between income related to 

qualified payments and income that is 

not related to qualified payments based 

on a ratio. The determination of whether 

the amounts mentioned by commenters 

are included in QBI of a trade or 

business, subject to the section 

199A(b)(7) reduction, and how these 

amounts are allocated may change based 

on a patron’s individual facts and 

circumstances and is not addressed in 

the final regulations. 

One commenter also requested that 

the safe harbor method in proposed 

§ 1.199A–7(f)(2)(ii) apply to patrons 

with a trade or business that has average 

annual total gross receipts equal to 

$25,000,000 or less. This amount is 

equal to the threshold for the small 

business simplified overall method 

under proposed § 1.199A–10(f)(1). 

Under the small business simplified 

overall method, a qualifying small 

Specified Cooperative may apportion 

total costs for the current taxable year 

between domestic production gross 

receipts (DPGR) and non-DPGR based 

on relative gross receipts for purposes of 

calculating the section 199A(g) 

deduction. The safe harbor in proposed 

§ 1.199A–7(f)(2)(ii) is different from the 

safe harbor in proposed § 1.199A– 

10(f)(1). Proposed § 1.199A–7(f)(2)(ii) is 

applied as part of the patron’s 

calculation of the section 199A(a) 

deduction. In calculating the section 

199A(a) deduction, the threshold 

amount (described in section 

199A(e)(2)) is used in other 

circumstances to determine when a 

taxpayer must engage in more complex 

calculations, specifically the W–2 wage 

and UBIA of qualified property 

limitations in section 199A(b)(2)(B). 

Thus, it is consistent with section 

199A(e)(2) for the safe harbor in 

proposed § 1.199A–7(f)(2)(ii) to adopt 

the threshold amount. This contrasts 

with the small business simplified 

overall method in § 1.199A–10(f)(1), 

used to compute the section 199A(g) 

deduction by a Specified Cooperative, 

and for which the threshold amount in 

section 199A(e)(2) is not relevant. 

Therefore, the final regulations do not 

adopt this request. 

The commenter also suggested 

cooperative and noncooperative farming 

expenses should be allocable based on 

sales. The commenter believes that if an 

allocation based on sales is not allowed, 

then it will be impossible for cash basis 

taxpayers to offset input expenses from 

the prior year to harvest revenues in the 

following year, because taxpayers would 

have already claimed the expenses in 

the prior year. Moreover, because 

farmers do not know if crops are sold to 

a Specified Cooperative or 

noncooperative until the crops are 

harvested, the potential exists for 

allocations to be understated/overstated 

as it relates to either Specified 

Cooperative/noncooperative revenues. 

The reasonable method approach in 

§ 1.199A–7(f)(2)(i) of the Proposed 

Regulations, which is the approach 

adopted in the final regulations, 

accommodates these timing issues. A 

reasonable method is based on the facts 

and circumstances of the taxpayer and 

should provide the needed flexibility to 

accommodate this fact pattern. 

D. Comments on Examples in Proposed 

§ 1.199A–7(g) 

Commenters requested corrections to 

proposed § 1.199A–7(g)(1), Example 1, 

because the allocation of W–2 wage 

expense is not proportional to the total 

expense allocation. This example 

illustrates that a reasonable method of 

allocation does not necessarily have to 

be proportional between W–2 wages and 

other expenses. This example is 

consistent with Example 1 in the Joint 

Committee Report. The Joint Committee 

Report in footnote 133 explains that 

example and the general rule by stating 

that ‘‘[w]hich expenses are properly 

allocable in a given case will depend on 

all the facts and circumstances. The 

example assumes that the fraction of 

properly allocable W–2 wages differs 

from the fraction of other properly 

allocable expenses.’’ Thus, a 

modification to the allocation in 

Example 1 of the proposed § 1.199A– 

7(g)(1) is not warranted. 

II. § 1.199A–8, Deduction for Income 

Attributable to Domestic Production 

Activities of Specified Cooperatives 

A. In General 

Section 199A(g) provides a deduction 

for Specified Cooperatives and their 

patrons. This deduction is similar in 

many respects to the former section 199 

deduction and, as provided in section 

199A(g)(6), these regulations are based 

on the regulations applicable to 

Specified Cooperatives and their 

patrons under former section 199. The 

section 199A(g) deduction is calculated 

by the Specified Cooperative and is 

equal to 9 percent of the lesser of the 

Specified Cooperative’s QPAI or taxable 

income (as modified by section 

199A(g)(1)(C)) for the taxable year. 

There is a further limitation on the 

deduction equal to 50 percent of the 

Specified Cooperative’s W–2 wages for 

the taxable year that are properly 

allocable to DPGR. Proposed § 1.199A– 

8 provides definitions relating to the 

section 199A(g) deduction, which 

includes establishing the criteria that a 

Specified Cooperative must satisfy to be 

eligible to claim the section 199A(g) 

deduction, and sets forth the necessary 

steps for a Specified Cooperative to 

calculate the section 199A(g) deduction. 

This part II.A provides a general outline 

of proposed § 1.199A–8, and the 

remainder of this part II addresses 

specific comments on proposed 

§ 1.199A–8. Other than as described in 

response to the specific comments, the 

final regulations generally follow the 

Proposed Regulations. 

Proposed § 1.199A–8(a), for purposes 

of section 199A(g), defines the terms 

patron (cross references proposed 

§ 1.1388–1(e)), Specified Cooperative, 

and agricultural or horticultural 

products. The definition of Specified 

Cooperative is consistent with section 

199A(g)(4) and the Joint Committee 

Report, and reflects the 2018 Act’s 

amendment to the definition originally 

provided by section 11011(a) of the 

TCJA.; that is, a Specified Cooperative 

no longer includes a Cooperative solely 

engaged in the provision of supplies, 

equipment, or services to farmers or 

other Specified Cooperatives. The 

definition of agricultural or horticultural 

products in the Proposed Regulations is 

based upon the Cooperative Marketing 

Act of 1926, 44 Stat. 802 (1926). 

Proposed § 1.199A–8(b) provides the 

four steps a Specified Cooperative that 

is not qualified as a farmer’s cooperative 

organization under section 521 

(nonexempt Specified Cooperative) 

performs to calculate its section 199A(g) 

deduction and includes definitions of 

relevant terms. Step 1, under proposed 


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§ 1.199A–8(b)(2)(i), requires a Specified 

Cooperative to identify its patronage 

and nonpatronage gross receipts, and 

related cost of goods sold (COGS), 

deductible expenses, W–2 wages, etc. 

(collectively, deductions) and allocate 

these deductions to the gross receipts 

from patronage and nonpatronage 

activity. Proposed § 1.199A–8(b)(2)(ii) 

directs a nonexempt Specified 

Cooperative to use only patronage gross 

receipts and related deductions when 

calculating the section 199A(g) 

deduction. Step 2, under proposed 

§ 1.199A–8(b)(3), requires a nonexempt 

Specified Cooperative to determine the 

patronage gross receipts that qualify as 

DPGR. Proposed § 1.199A–9 provides 

rules for determining whether gross 

receipts are DPGR. Step 3, under 

proposed § 1.199A–8(b)(4), requires a 

Specified Cooperative to calculate QPAI 

(including oil-related QPAI) from only 

patronage DPGR and patronage 

deductions. Further rules for allocating 

COGS and other expenses, losses, or 

deductions to patronage DPGR are in 

proposed § 1.199A–10. A nonexempt 

Specified Cooperative calculates the 

section 199A(g) deduction using step 4, 

under proposed § 1.199A–8(b)(5). 

Proposed § 1.199A–8(b) also provides a 

definition of taxable income (including 

how to take net operating losses (NOLs) 

into account), rules on the use of the 

patronage section 199A(g) deduction, 

and special rules for nonexempt 

Specified Cooperatives that have oilrelated QPAI. 

Proposed § 1.199A–8(c) provides rules 

explaining the steps a Specified 

Cooperative that is qualified as a 

farmer’s cooperative organization under 

section 521 (exempt Specified 

Cooperative) performs to calculate its 

section 199A(g) deduction. Generally, 

exempt Specified Cooperatives follow 

the same steps as nonexempt Specified 

Cooperatives, except that exempt 

Specified Cooperatives are not 

disallowed a section 199A(g) deduction 

based on nonpatronage gross receipts 

and related deductions. Instead, exempt 

Specified Cooperatives performs step 1 

to identify patronage and nonpatronage 

gross receipts and related deductions, 

and then performs steps 2 through 4 in 

proposed § 1.199A–8(b) twice, to 

calculate a patronage section 199A(g) 

deduction and a nonpatronage section 

199A(g) deduction. Proposed § 1.199A– 

8(c)(4)(ii) explains that the 

nonpatronage section 199A(g) deduction 

can be used only against nonpatronage 

income and cannot be passed through to 

patrons. 

Proposed § 1.199A–8(d) provides 

rules for Specified Cooperatives passing 

through the section 199A(g) deduction 

to patrons. In general, under proposed 

§ 1.199A–8(d)(1), a Specified 

Cooperative may pass through all, some, 

or none of the section 199A(g) 

deduction to patrons who are eligible 

taxpayers as defined in section 

199A(g)(2)(D), that is, (i) a patron that is 

other than a corporation defined in 

section 1361(a)(2) (C corporation) or (ii) 

a patron that is a Specified Cooperative. 

Proposed § 1.199A–8(d)(2) limits the 

amount of the section 199A(g) 

deduction that a Specified Cooperative 

can pass through to the portion of the 

section 199A(g) deduction that is 

allowed with respect to the QPAI to 

which the qualified payments (defined 

in proposed § 1.199A–8(d)(2)(ii)) made 

to the eligible taxpayer are attributable. 

Proposed §§ 1.199A–8(d)(3) through (7) 

further outlines the written notice 

requirement to pass through the 

deduction to a patron, the patron’s 

ability to deduct the section 199A(g) 

passed through (generally limited to the 

patron’s taxable income), that a 

Specified Cooperative that is passed 

through a section 199A(g) deduction as 

an eligible taxpayer is limited to taking 

the deduction only against patronage 

gross income and related deductions, 

that the W–2 wage limitation is applied 

only at the Specified Cooperative level, 

and that a Specified Cooperative must 

reduce its section 1382 deduction by an 

amount equal to the section 199A(g) 

deduction passed through to its eligible 

patrons. 

The remainder of proposed § 1.199A– 

8 covers a variety of issues. Proposed 

§ 1.199A–8(e) provides examples that 

illustrate the rules in proposed 

§ 1.199A–8(b) through (d). Proposed 

§ 1.199A–8(f) provides guidance for 

Specified Cooperatives that are partners 

in a partnership. Proposed § 1.199A– 

8(g) provides guidance on the recapture 

of a claimed section 199A(g) deduction. 

Finally, proposed § 1.199A–8(h) 

generally provides that taxpayers may 

rely on the proposed rules in their 

entirety and as applied in a consistent 

manner until final regulations are 

published in the Federal Register. 

B. Comments Related to Definition of 

‘‘Agricultural or Horticultural Products’’ 

i. General Comments on Definition 

Section 199A(g)(3)(D) defines DPGR 

as the gross receipts of a taxpayer that 

are derived from any lease, rental, 

license, sale, exchange, or other 

disposition (collectively, disposition) of 

any agricultural or horticultural product 

that was manufactured, produced, 

grown, or extracted (MPGE) by the 

taxpayer in whole or significant part 

within the United States. Proposed 

§ 1.199A–8(a)(4) defines agricultural or 

horticultural products as agricultural, 

horticultural, viticultural, and dairy 

products, livestock and the products 

thereof, the products of poultry and bee 

raising, the edible products of forestry, 

and any and all products raised or 

produced on farms and processed or 

manufactured products thereof within 

the meaning of the Cooperative 

Marketing Act of 1926, 44 Stat. 802 

(1926). Agricultural or horticultural 

products also include aquatic products 

that are farmed whether by an exempt 

or a nonexempt Specified Cooperative. 

In addition, agricultural or horticultural 

products include fertilizer, diesel fuel, 

and other supplies used in agricultural 

or horticultural production that are 

MPGE by a Specified Cooperative. 

Agricultural or horticultural products, 

however, do not include intangible 

property (other than as provided in the 

exception in § 1.199A–9(b)(2)); for 

example, an agricultural or horticultural 

product includes a seed that is grown, 

but does not include the intangible 

property right to reproduce a seed for 

sale. This exclusion of intangible 

property does not apply to intangible 

characteristics of any particular 

agricultural or horticultural product. For 

example, gross receipts from the sale of 

different varieties of oranges would all 

qualify as DPGR from the disposition of 

agricultural or horticultural products 

(assuming all other requirements of 

section 199A(g) are met). However, 

gross receipts from the license of the 

right to produce and sell a certain 

variety of an orange would be 

considered separate from the orange and 

not from an agricultural or horticultural 

product. 

One commenter requested that the 

definition be omitted on the premise 

that the meaning of farming and 

agricultural or horticultural product is 

generally understood by the agricultural 

community and their advisors, and 

argued that there was no current, 

comprehensive definition of these terms 

in the Code or regulations. Because 

section 199A(g) is focused solely on 

dispositions of agricultural or 

horticultural products, as opposed to 

the broader scope of former section 199, 

the Treasury Department and the IRS 

have determined a definition is 

necessary to provide guidance on the 

limits of the section 199A(g) deduction. 

As an alternative to removing the 

definition, the commenter 

recommended against referencing nontax legislation or regulations because the 

definitions were developed independent 

of tax law. The Treasury Department 

and the IRS have determined that using 


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the definition from the Proposed 

Regulations, based on a pre-existing 

definition from non-tax cooperative law 

specifically referencing the type of 

cooperative at issue here, is the best 

alternative, but have made some 

modifications based on the commenter’s 

suggested definition. The definition in 

the final regulations includes parts of 

the commenter’s suggested definition, 

by providing examples (without 

limitation) of products that are 

considered agricultural or horticultural 

products, including specific agricultural 

or horticultural products, livestock 

products, edible forestry products, and 

farmed aquatic products. 

ii. Comments on Exclusion of Intangible 

Property 

A commenter requested that the 

definition of agricultural or horticultural 

products include intangible property. 

The commenter reasoned that because a 

license is a disposition under section 

199A(g)(3)(D) for purposes of 

determining if gross receipts qualify as 

DPGR, an exploitation of intangible 

property is implied. However, the 

inclusion of the term license under 

section 199A(g)(3)(D) does not impact 

the definition of agricultural or 

horticultural products. The term license 

also appeared in former section 

199(c)(4)(A)(i), which was the 

equivalent of section 199A(g)(3)(D) 

under former section 199. Under former 

section 199, DPGR generally meant the 

gross receipts of the taxpayer derived 

from qualifying production property 

(QPP) which was MPGE by the taxpayer 

in whole or significant part within the 

US. Income from the disposition of 

intangible property (with the specific 

exception of computer software, sound 

recordings under section 168(f)(4), and 

qualified films under former section 

199(c)(6)) were generally excluded from 

DPGR. This was because intangible 

property was not QPP (as defined in 

former section 199(c)(5), also see former 

§ 1.199–3(j)(2)(iii)). The proposed 

definition and rules reach a similar 

result for purposes of section 199A(g). 

Also related to intangible property, 

the commenter specifically requested 

that gross receipts qualify as DPGR from 

the disposition of an agricultural or 

horticultural product when a Specified 

Cooperative enters into a long-term 

arrangement with an unrelated third 

party, under which (1) the Specified 

Cooperative develops a finished retail 

product with the unrelated third party, 

(2) the finished retail product contains 

a patron’s product as an ingredient, and 

(3) the Specified Cooperative receives a 

royalty or license fee based on the sale 

of the finished retail product 

irrespective of whether the Specified 

Cooperative’s brand, label, and/or 

tradename is featured on the finished 

retail product. The situation described 

by the commenter is very fact specific 

and raises multiple possible issues for 

purposes of section 199A(g). Among the 

issues to consider are what property or 

properties the Specified Cooperative is 

deriving gross receipts from in the 

normal course of business, and which 

party is the producer of the property. 

Because of the fact specific nature of the 

comment, and multiple possible 

outcomes, there is no rule or example to 

address this specific situation in the 

final regulations. 

After consideration of the comments, 

the final regulations maintain the 

approach in the Proposed Regulations 

that the definition of agricultural or 

horticultural products does not include 

intangible property, but also provide 

language further clarifying the 

exclusion. The clarifying language 

provides that intangible rights include 

the rights to MPGE and sell an 

agricultural or horticultural product 

with certain characteristics protected by 

a patent and the trademark of a brand. 

Further examples 9 and 10 have been 

added to § 1.199A–8(e) to illustrate 

concepts related to intangible property 

transactions and the disposition of 

agricultural or horticultural products. 

iii. Comments on ‘‘Other Supplies’’ 

Included in the definition of 

agricultural or horticultural products are 

other supplies that are MPGE by the 

Specified Cooperative. A commenter 

suggested that the MPGE requirement be 

removed from ‘‘other supplies’’ on the 

basis that Joint Committee Report 

footnote 120 cites § 1.199–6(f), which 

made no mention of a MPGE 

requirement as it pertained to ‘‘other 

supplies’’ being agricultural or 

horticultural products. However, 

footnote 120 explicitly mentions a 

MPGE requirement as it pertains to 

other supplies. The Joint Committee 

Report also explains that after the 

amendments to section 199A(g) made by 

the 2018 Act, ‘‘[t]he definition of 

[specified agricultural or horticultural 

cooperative] no longer includes a 

[C]ooperative solely engaged in the 

provision of supplies, equipment, or 

services to farmers or other specified 

agricultural or horticultural 

cooperatives.’’ Joint Committee Report, 

23. Based upon these considerations, 

subjecting ‘‘other supplies’’ to a MPGE 

requirement before being considered 

agricultural or horticultural products is 

appropriate. 

Commenters also requested that 

‘‘other supplies’’ be further illustrated 

with examples. The final regulations 

include more examples of ‘‘other 

supplies’’ such as seed, feed, herbicides, 

and pesticides. 

Finally, one commenter requested 

that language be added to the definition 

of agricultural or horticultural products 

to include supplies used in activities 

under § 1.199A–9(f)(2) and (3). Under 

proposed § 1.199A–9(f)(2) and (3), if the 

Specified Cooperative performs 

packaging, repackaging, labeling, or 

installation with respect to an 

agricultural or horticultural product and 

engages in no other MPGE activity with 

respect to that agricultural or 

horticultural product, the Specified 

Cooperative’s activity does not qualify 

as MPGE with respect to that 

agricultural or horticultural product. 

Based on this rule, to the extent a 

Specified Cooperative performs MPGE 

activities with respect to an agricultural 

or horticultural product, and in 

conjunction performs a packaging, 

repackaging, labeling, or installation 

activity, the activities are treated as part 

of the MPGE of the agricultural 

production. The packaging or labeling 

materials used may also be treated as 

part of the agricultural or horticultural 

product. For example, if a Specified 

Cooperative packages an agricultural or 

horticultural product that the Specified 

Cooperative had MPGE, then the 

packaging activity is treated as part of 

the MPGE of the agricultural or 

horticultural product, and gross receipts 

from the sale of the packaged 

agricultural or horticultural product all 

qualify as DPGR, assuming all other 

requirements for such treatment are met. 

However, property packaged or offered 

with an agricultural or horticultural 

product that is not an agricultural or 

horticultural product (or packaging) is 

not considered part of the agricultural or 

horticultural product. 

C. Identifying Patronage Items and 

Exclusion of Nonpatronage Items for 

Nonexempt Specified Cooperatives 

As previously described, proposed 

§ 1.199A–8(b) outlines a four-step 

process for nonexempt Specified 

Cooperatives to use in calculating the 

section 199A(g) deduction. Step 1, in 

proposed § 1.199A–8(b)(2)(i) and (ii), 

requires a nonexempt Specified 

Cooperative to identify its gross 

receipts, COGS, deductions, W–2 wages, 

etc. as patronage or nonpatronage, and 

allows only the patronage activities to 

be included in the calculation of the 

section 199A(g) deduction. One 

commenter described step 1 as 

burdensome and unnecessary, and 

suggested removal of that step. Further, 

the commenter asserted that both 


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patronage and nonpatronage activities 

should be included in the section 

199A(g) deduction calculation for 

nonexempt Specified Cooperatives. The 

commenter provided, as an alternative 

to removal of that step, that these rules 

be reserved until the conclusion of 

litigation under former section 199 

relating to the calculation of the former 

section 199 deduction by Specified 

Cooperatives. 

The Treasury Department and the IRS 

decline to adopt these comments in the 

final regulations for the reasons 

described in the following paragraphs. 

However, the final regulations make 

revisions to the proposed regulations to 

benefit and reduce complexity for 

Specified Cooperatives with de minimis 

gross receipts from nonpatronage 

activities. 

Section 199A(g)(4)(A) defines a 

Specified Cooperative, in part, as an 

organization to which part I of 

subchapter T applies. Under section 

1381(a)(2), subchapter T applies to any 

corporation operating on a cooperative 

basis, with certain exceptions not 

relevant here. In the commenter’s view, 

this means that if subchapter T applies, 

it applies to the entire corporation, and 

the benefits of the section 199A(g) 

deduction should follow that 

determination. In support of this 

position, the commenter argues that the 

plain language of the statute and the 

Joint Committee Report do not limit the 

deduction to patronage activities. The 

commenter’s view fails to properly take 

into account how subchapter T applies 

to nonexempt Cooperatives that have 

both cooperative and noncooperative 

operations. This is an especially 

important consideration because of the 

exclusion of C corporations from the 

definition of eligible taxpayers under 

section 199A(g)(2)(D)(i), and the fact 

that section 199A as a general matter is 

not intended to benefit C corporations. 

When a nonexempt Cooperative does 

not act entirely on a cooperative basis 

under subchapter T, its activities are 

characterized as patronage or 

nonpatronage, and accordingly, the tax 

items from these distinct activities 

receive different treatment. See Buckeye 

Countrymark, Inc. v. Comm’r, 103 T.C. 

547, at 559 (1994) (explaining that 

‘‘subchapter T requires nonexempt 

cooperatives to separate income and 

deductions into two categories or 

baskets, one for patronage income and 

deductions and one for nonpatronage 

income and deductions’’) and Farm 

Service Coop. v. Comm’r, 619 F.2d 718 

(8th Cir. 1980) (subchapter T prohibits 

the netting of patronage losses against 

nonpatronage income). Cooperative 

activities generate patronage income 

and deductions and are taxed on a 

cooperative basis, generally resulting in 

a single-level of tax to the Cooperative 

or the patrons after application of the 

rules under subchapter T. See Joint 

Committee Report, 20 (explaining that 

‘‘excluding patronage dividends and 

per-unit retain allocations paid by the 

cooperative from the cooperative’s 

taxable income in effect allows the 

cooperative to be a conduit with respect 

to profits derived from transactions with 

its patrons’’). In contrast, 

noncooperative activities of a 

Cooperative generate nonpatronage 

income and deductions and are taxed 

like a for-profit business of a C 

corporation, resulting in a double-level 

of tax, that is, at both the Cooperative 

and patron levels. See, for example, 

Farm Service at 723, and Conway Cty. 

Farmers Ass’n v. United States, 588 

F.2d 592, 596 (8th Cir. 1978) (describing 

nonpatronage income as being taxed as 

a for-profit business in case where 

organization found to be operating on a 

cooperative basis with more than 50 

percent of business done with 

nonmembers). 

There is limited guidance as to how 

much of an organization’s activities 

must be conducted on a cooperative 

basis for the organization to qualify as 

a Cooperative under subchapter T, but 

the available guidance suggests a low 

threshold in certain cases. To the extent 

this is true, it allows for the 

noncooperative activities to be of 

substantial value relative to the 

organization’s cooperative activities. For 

example, in Columbus Fruit and 

Vegetable Coop. Ass’n, Inc. v. United 

States, 7 Cl. Ct. 561 (March 27, 1985), 

the court held that an agricultural 

organization whose sales of members’ 

merchandise accounted for only about 

24 percent of value of its total sales for 

the tax years in question was 

nevertheless a corporation operating on 

a cooperative basis within the meaning 

of the Code, and thus was entitled to 

deduct patronage dividends paid to its 

members. 

The Treasury Department and IRS 

compared how application of the rules 

of subchapter T aligned with the 

commenter’s proposal and with the 

Proposed Regulations and found the 

subchapter T rules align better with the 

Proposed Regulations. Among the 

scenarios considered were C 

corporations engaged in the following: 

(1) An agricultural business with no 

cooperative activities (scenario 1); (2) an 

agricultural business operating entirely 

on a cooperative basis considered a 

nonexempt Specified Cooperative 

(scenario 2); and, (3) an agricultural 

business with a mixed percentage of 

business from cooperative and 

noncooperative activities that qualifies 

as a nonexempt Specified Cooperative 

(scenario 3). 

In the first and second scenarios, both 

the commenter’s proposal and the 

Proposed Regulations reach the same 

conclusions. In the first scenario, 

because none of the organization’s 

activities are conducted on a 

cooperative basis, subchapter T does not 

apply to the organization, and the 

organization receives no benefits from 

the section 199A(g) deduction. In the 

second scenario, because all the 

organization’s activities are conducted 

on a cooperative basis, the benefits of 

subchapter T apply to all of the 

organization’s activities, and the 

organization can calculate the section 

199A(g) deduction based on all its 

activities. 

It is the third scenario where the 

conclusions under the commenter’s 

proposal and the Proposed Regulations 

differ. Under the commenter’s proposal, 

subchapter T applies to the organization 

and so the organization should calculate 

a single section 199A(g) deduction by 

aggregating the patronage income, 

deductions, etc., resulting from 

cooperative activities and the 

nonpatronage income, deductions, etc., 

resulting from noncooperative activities. 

The commenter’s proposal would 

permit a Specified Cooperative to 

calculate and take the section 199A(g) 

deduction on its business activities that 

are not operated on a cooperative basis 

(those activities that generate income 

that is taxed as that of a C corporation). 

This would be the case even where a 

substantial portion of the income of the 

Specified Cooperative is generated from 

business activities not operated on a 

cooperative basis. In contrast, the 

Proposed Regulations allow the 

organization to calculate the section 

199A(g) deduction based only on the 

patronage income, deductions, etc., 

resulting from the organization’s 

cooperative activities. 

The Proposed Regulations, and not 

the commenter’s proposal, align with 

subchapter T and the structure and 

intent of section 199A. Under 

subchapter T, a nonexempt Cooperative 

with both cooperative and 

noncooperative activities receives 

beneficial single-level tax treatment 

only on its patronage income, and its 

income from operating as a C 

corporation (that is, nonpatronage 

income) receives double-level tax 

treatment. Farm Service at 723. 

Generally, section 199A was structured 

to give businesses that are not operating 

as C corporations a deduction that 

corresponds to the TCJA’s reduction of 


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the top corporate rate of tax from 35 

percent to 21 percent under section 11. 

Indeed, Congress needed to specifically 

clarify that Specified Cooperatives 

could benefit from the section 199A 

deduction because Cooperatives are C 

Corporations. See section 1382(a)(2). 

That is, Congress, in including section 

199A(g), was making sure that Specified 

Cooperatives received a benefit when 

operating as Cooperatives. This also 

makes sense when considering that 

patronage distributions deductible 

under section 1382 to a Specified 

Cooperative, which enable the Specified 

Cooperative to act as a conduit for its 

patrons, are taxed to the patrons eligible 

for the section 199A(a) deduction at 

individual rates. The Proposed 

Regulations align with this intent 

because only the activities resulting in 

patronage income receive beneficial 

treatment under section 199A(g), and 

income arising from nonpatronage 

activities continues to be taxed as 

income from a C corporation. Were the 

result as requested by commenter, a C 

corporation conducting a portion of its 

business on a cooperative basis would 

receive the benefits of both the reduced 

corporate income tax rate and the 

section 199A(g) deduction with respect 

to its nonpatronage activities, giving it 

a competitive advantage relative to a 

regular C corporation. 

The commenter also referred to 

section 199A(g)(6), which provides that 

the Secretary shall prescribe regulations 

as are necessary to carry out the 

purposes of section 199A(g), and that 

the regulations shall be based on the 

regulations applicable to Cooperatives 

and their patrons under section 199 (as 

in effect before its repeal). The 

commenter noted that the former 

section 199 regulations did not exclude 

nonpatronage income from the 

calculation of the former section 199 

deduction. However, because there are 

material differences between former 

section 199 and section 199A, section 

199A(g)(6) does not require that the 

section 199A(g) regulations replicate or 

duplicate the former section 199 

regulations in their entirety. The former 

section 199 regulations did not 

specifically address an organization 

with cooperative and noncooperative 

operations because former section 199 

applied to all categories of businesses, 

including C corporations, whether 

operating on a cooperative basis, 

noncooperative basis, or both. In 

contrast to the former section 199 

deduction, the section 199A(g) 

deduction, which must be read in the 

context of section 199A, does not apply 

to C corporations generally. Unlike for 

the former section 199 regulations, 

clarification of this distinction is 

necessary to carry out the purposes of 

section 199A(g), which include 

providing the section 199A(g) deduction 

for the patronage activities of Specified 

Cooperatives. Clarification of this 

distinction is also necessary to assist 

taxpayers in complying with the law, as 

well as to aid the proper administration 

of section 199A(g). 

The Treasury Department and the IRS 

also considered the recent opinions in 

Ag Processing, Inc. v. Comm’r, 153 T.C. 

No. 3 (2019), and Growmark, Inc. & 

Subsidiaries v. Comm’r, T.C. Memo. 

2019–161. These cases are the litigation 

referred to by the commenter. In Ag 

Processing and Growmark, the Tax 

Court determined that under former 

section 199, a nonexempt agricultural 

Cooperative should calculate the section 

199 deduction in the aggregate by 

combining patronage and nonpatronage 

items and then allocating the total 

section 199 deduction between the 

Cooperative’s patronage and 

nonpatronage businesses. These cases 

do not support, and in fact, conflict with 

the commenter’s proposal in that they 

require an allocation of the former 

section 199 deduction between 

patronage and nonpatronage businesses. 

At the same time, the Tax Court’s 

approach in these cases allows the 

proceeds of the cooperative and 

noncooperative businesses to be 

combined to calculate an aggregate 

deduction before allocation. The 

allowance of an aggregate calculation 

highlights the difference between 

section 199A(g), benefitting solely 

cooperative activities, and former 

section 199, benefitting both cooperative 

and noncooperative activities. Thus, the 

cases do not necessitate that final 

regulations adopt an approach different 

from that of the Proposed Regulations. 

Based on the commenter’s proposal, the 

Treasury Department and IRS 

considered calculating the section 

199A(g) deduction on an aggregate basis 

and then disallowing the nonpatronage 

portion, but this would require 

unnecessary calculations and likely 

prove less accurate than the 

straightforward calculation provided in 

the Proposed Regulations. 

Finally, the Treasury Department and 

IRS considered how the commenter’s 

proposal would align with the treatment 

of exempt Specified Cooperatives. The 

commenter’s proposal would allow both 

exempt and nonexempt Specified 

Cooperatives to calculate their section 

199A(g) deductions based on both 

cooperative and noncooperative 

activities. The Proposed Regulations 

permit only exempt Specified 

Cooperatives to calculate their section 

199A(g) deductions based on both 

cooperative and noncooperative 

activities. Under subchapter T, exempt 

Cooperatives can receive the beneficial 

single-level tax treatment with respect 

to both types of business activities while 

nonexempt Cooperatives cannot. In 

effect, by meeting the requirements of 

section 521, the entirety of an exempt 

organization’s operations can be treated 

as done on a cooperative basis. Exempt 

Specified Cooperatives, thus, are 

effectively equivalent to the described 

scenario 2 (a nonexempt Specified 

Cooperative operating entirely on a 

cooperative basis). The commenter’s 

proposal would provide the same 

benefits of the section 199A(g) 

deduction to nonexempt Specified 

Cooperatives without requiring those 

Cooperatives to meet the requirements 

of section 521. 

In summary, the Treasury Department 

and the IRS have determined that 

retaining step 1 in proposed § 1.199A– 

8(b)(2)(i) and (ii) is the approach for 

calculating the section 199A(g) 

deduction that best reflects the law and 

is most consistent with the scope of 

section 199A(g) and the application of 

subchapter T to nonexempt 

Cooperatives. 

The final regulations, however, revise 

the rule for applicable gross receipts in 

§ 1.199A–8(b)(2)(ii) to allow a Specified 

Cooperative to include all nonpatronage 

gross receipts in non-DPGR for purposes 

of the de minimis rules in § 1.199A– 

9(c)(3), while also increasing the de 

minimis percentage in the de minimis 

rules in § 1.199A–9(c)(3) from 5 percent 

to 10 percent. These revisions expand 

the type of gross receipts eligible for the 

de minimis rules and should increase 

the number of Specified Cooperatives 

that can apply the de minimis rules. 

Applying the de minimis rule in 

§ 1.199A–9(c)(3)(i) after these revisions 

means that a Specified Cooperative 

when calculating its patronage section 

199A(g) deduction can treat all of its 

gross receipts as DPGR when the 

Specified Cooperative derives less than 

10 percent of its total gross receipts from 

non-DPGR (with non-DPGR now 

possibly including all gross receipts 

from nonpatronage as well as other 

patronage non-DPGR). While this 

provides the benefit of increased DPGR, 

application of the de minimis rule in 

§ 1.199A–9(c)(3)(i) also reduces 

complexity by simplifying the 

allocations needed to calculate the 

section 199A(g) deduction. Under 

§ 1.199A–9(c)(3)(ii), the revisions also 

make it possible for any Specified 

Cooperative deriving less than 10 

percent of their gross receipts from 


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DPGR to treat all of their gross receipts 

as non-DPGR. The final regulations also 

update § 1.199A–8(b)(5)(ii)(C), 

§ 1.199A–8(c)(2) and (4), and § 1.199A– 

12(b)(1) to take these revisions into 

account. 

D. Exempt Specified Cooperative 

Calculation of Nonpatronage Section 

199A(g) Deduction 

Rules for exempt Specified 

Cooperatives to calculate the section 

199A(g) deduction were included in 

proposed § 1.199A–8(c). Specifically, 

under proposed § 1.199A–8(c)(2), an 

exempt Specified Cooperative calculates 

separate patronage and nonpatronage 

section 199A(g) deductions, as is 

consistent with the administration of 

former section 199. One commenter 

disputed that separate calculations were 

required under former section 199 and 

further stated that separate calculations 

are unnecessary since exempt Specified 

Cooperatives are permitted the section 

199A(g) deduction on both their 

patronage and nonpatronage income. 

Contrary to the commenter’s assertion, 

the instruction to line 25 for 

Agricultural and Horticultural 

Cooperatives on the Form 8903, 

Domestic Production Activities 

Deduction, makes clear that the 

calculations are made separately. This 

step is necessary because allowing an 

aggregate calculation and allocation 

results in less accurate patronage and 

nonpatronage deductions because 

alignment of the appropriate W–2 

wages, COGS, and other expenses from 

an activity with the income from that 

activity is lost on aggregation, and 

difficult to rectify on allocation. For 

these reasons, the final regulations 

maintain the requirement of separate 

calculations of the patronage section 

199A(g) deductions and nonpatronage 

section 199A(g) deductions by exempt 

Specified Cooperatives. However, the 

revisions in the final regulations to 

§ 1.199A–8(b)(2)(ii) and the increase in 

the de minimis percentage under 

§ 1.199A–9(c)(3) will simplify the 

allocations needed to calculate the 

section 199A(g) deduction for an 

exempt Specified Cooperative with de 

minimis nonpatronage gross receipts. 

E. Definition of Taxable Income 

i. General Definition Comments 

Proposed § 1.199A–8(b)(5)(ii)(C) 

provides that taxable income is defined 

in section 1382 and § 1.1382–1 and 

§ 1.1382–2. For purposes of determining 

the amount of the deduction allowed 

under § 1.199A–8(b)(5)(ii), taxable 

income is limited to taxable income and 

related deductions from patronage 

sources. Patronage NOLs reduce taxable 

income. Taxable income is determined 

without taking into account the section 

199A(g) deduction or any deduction 

allowable under section 1382(b). 

Further, taxable income is determined 

using the same method of accounting 

used to determine distributions under 

section 1382(b) and qualified payments 

to eligible taxpayers. 

One commenter stated that the 

definition of taxable income should 

refer to section 63, and take into account 

both patronage and nonpatronage 

income (including NOLs) on an 

aggregate basis. The Treasury 

Department and the IRS agree that 

section 63 generally defines taxable 

income. In response, the definition of 

taxable income in the final regulations 

has been modified so that it also 

includes a reference to section 63. 

However, consistent with the exclusion 

of nonpatronage items from the 

calculation of the section 199A(g) 

deduction, the final regulations 

continue to limit the definition to 

patronage taxable items for purposes of 

the limitation. 

The commenter also stated that the 

requirement that Specified Cooperatives 

use the same method of accounting to 

determine taxable income, distributions 

under section 1382(b), and qualified 

payments is in error. Specifically, 

commenter stated that patronage 

dividends or other similar payments to 

patrons can be calculated on a book 

basis because it is a more accurate 

economic measure of income over time. 

The commenter provided an example 

where accelerated depreciation and 

other book/tax items often cause timing 

differences that may disproportionately 

benefit longer-term patrons over shorterterm patrons. Commenter further 

maintained that Cooperatives have been 

allowed to determine payments to 

patrons pursuant to methods other than 

on tax basis. The commenter pointed to 

section 1388(a)(3), which in defining 

patronage dividends, references the net 

earnings of the organization. In the 

commenter’s view, the use of net 

earnings rather than taxable income 

means that net earnings do not 

necessarily correlate to taxable income. 

Further, the commenter pointed to 

Example 2 of former § 1.199–6(m) that 

included language indicating patronage 

distributions could be paid based on 

book or Federal income tax net earnings, 

as well as the requirement on Form 

1120–C (U.S. Income Tax Form for 

Cooperative Associations) that a 

cooperative disclose the method of 

accounting used to compute 

distributable patronage income, with the 

choices being ‘‘Book,’’ Tax,’’ and 

‘‘Other.’’ 

In reviewing this part of the 

definition, the Treasury Department and 

the IRS determined it is unnecessary for 

defining taxable income to include the 

requirement that taxable income is 

determined using the same method of 

accounting used to determine 

distributions under section 1382(b) and 

qualified payments to eligible taxpayers. 

Accordingly, the final regulations do not 

include this requirement in § 1.199A– 

8(b)(5)(ii)(C) and also do not include a 

similar requirement in § 1.199A– 

8(c)(4)(i). The commenter’s example and 

reasoning, however, relate more to the 

deductibility under section 1382 of 

distributions to patrons calculated on a 

book basis when there are book/tax 

differences, which is outside of the 

scope of the final regulations. No 

inference as to the deductibility of 

distributions to patrons under section 

1382 is intended by removing this 

language (regardless of the method used 

to determine the payments). 

ii. Comments on Net Operating Loss 

(NOL) Ordering Rules 

Proposed § 1.199A–8(b)(5)(ii)(C) 

provides that patronage NOLs reduce 

taxable income. However, taxable 

income does not take into account the 

section 199A(g) deduction or any 

deduction allowable under section 

1382(b). A commenter requested 

clarification on ordering rules 

concerning the interplay of NOLs, 

section 1382(b), and section 199A(g) 

deductions. Specifically, the commenter 

requested that final regulations clarify 

that the amount of an NOL that is taken 

into account for purposes of calculating 

the section 199A(g) deduction is the 

amount that the Specified Cooperative 

actually used in computing taxable 

income on its tax return for the year. 

The commenter further suggested that 

NOLs should not be regarded as having 

been used against any patronage 

dividends or per-unit retain allocations 

that are disregarded in computing 

taxable income for purposes of the 

section 199A(g) deduction limitation. 

The commenter provided an example 

where a nonexempt Specified 

Cooperative generated $100 of QPAI and 

taxable income, without taking account 

any of its deductions under section 

1382(b) or section 199A(g), or an NOL 

carryover of $500. In the commenter’s 

example, the nonexempt Specified 

Cooperative was able to calculate and 

use a $9 section 199A(g) deduction, pay 

out a $91 patronage dividend, and avoid 

using any of the $500 NOL carryover. 

In consideration of the commenter’s 

example, the Treasury Department and 


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the IRS reviewed Examples 1 and 2 in 

former § 1.199–1(b)(2), which illustrated 

that when calculating and using the 

former section 199 deduction, taxable 

income is reduced by any available NOL 

or NOL carryovers, before being reduced 

by the section 199 deduction. This 

avoided having the former section 199 

deduction create or increase an NOL, 

but did not illustrate how section 1382 

deductions impacted the calculation or 

use of the former section 199 deduction. 

Consistent with former section 199, 

taxable income for purposes of 

calculating the section 199A(g) 

deduction should take into account an 

NOL or NOL carryover. After 

calculation, the section 199A(g) 

deduction should not create or increase 

an NOL or NOL carryover. The section 

199A(g) deduction also should not be 

used as a substitute for an NOL 

carryover when a Specified Cooperative 

has taxable income remaining after its 

section 1382 deductions, but before the 

section 199A(g) deduction is taken. 

Using the facts of the commenter’s 

example, this means that for purposes of 

calculating the section 199A(g) 

deduction, the $500 NOL carryover 

should reduce taxable income by $9, 

which is the amount that remains after 

the section 1382(b) deduction. Taxpayer 

would calculate a section 199A(g) 

deduction based on $91 (the lesser of 

QPAI ($100) or taxable income ($91), 

without taking section 1382(b) 

deduction into account). As a result 

under these facts, taxpayer would have 

$0 of taxable income after taking a 

section 1382 deduction of $91 and using 

$9 of the $500 NOL carryover (leaving 

a $491 NOL carryover). The Specified 

Cooperative could pass through the 

section 199A(g) deduction to patrons 

and reduce its section 1382 deduction 

accordingly. However, if the Specified 

Cooperative did not pass through the 

section 199A(g) deduction it would be 

lost because the deduction cannot 

increase an NOL carryover. In 

accordance with this analysis, the 

definition of taxable income in 

§ 1.199A–8(b)(5)(ii)(C) and the rules in 

§ 1.199A–8(b)(6) related to a Specified 

Cooperative using the section 199A(g) 

deduction have been updated. To 

illustrate this ordering rule, example 5 

has also been added under § 1.199A– 

8(e). Based on this ordering rule and its 

reasoning, the Treasury Department and 

the IRS decline to adopt the 

commenter’s approach permitting 

Specified Cooperatives to reduce taxable 

income by taking the section 199A(g) 

deduction before using an NOL, but 

clarify that NOLs are not used against 

taxable income that is the result of not 

taking into account section 1382 

deductions when calculating the section 

199A(g) deduction. 

The commenter also stated that the 

examples in the proposed regulation 

(Examples 6 and 7 of proposed 

§ 1.199A–8(e)) do not consider the more 

realistic case where the Specified 

Cooperative made payments to patrons 

that were deductible under section 

1382(b). The Treasury Department and 

the IRS agree with this statement, and 

the new example in § 1.199A–8(e) 

replaces those examples from the 

Proposed Regulations. 

F. Pass Through of Section 199A(g) 

Deduction 

Sections 1.199A–8(d)(1) and (2) of the 

Proposed Regulations allow a Specified 

Cooperative, at its discretion, to pass 

through all, some, or none of its 

patronage section 199A(g) deduction to 

an eligible taxpayer (i.e., a patron other 

than a C Corporation or a patron that is 

a Specified Cooperative), but the 

amount passed through to any eligible 

taxpayer is limited to the allowable 

portion of the section 199A(g) deduction 

with respect to the QPAI to which the 

qualified payments made to the eligible 

taxpayer are attributable. The intent of 

the proposed rule was to allow the 

Specified Cooperative the benefit of 

retaining and using the amounts equal 

to the section 199A(g) deduction 

attributable to non-eligible taxpayers 

(who will not be able to use the 

deduction) at the Specified Cooperative 

level, even when the Specified 

Cooperative chooses to pass through all 

or some of the section 199A(g) 

deduction attributable to patrons that 

are eligible taxpayers. Consistent with 

section 199A(g)(2)(A)(ii), proposed 

§ 1.199A–8(d)(3) provides that a 

Specified Cooperative must identify in a 

written notice the amount of the 

deduction passed through to an eligible 

taxpayer, and the notice must be mailed 

by the Specified Cooperative to the 

eligible taxpayer no later than the 15th 

day of the ninth month following the 

close of the taxable year of the Specified 

Cooperative. The 15th day of the ninth 

month coincides with the end of the 

payment period as described in section 

1382(d). 

Commenters asked that the final 

regulations clarify that a Specified 

Cooperative will not be penalized if it 

passes through information relating to a 

section 199A(g) deduction to a noneligible taxpayer, and that the ultimate 

determination of whether the deduction 

that is passed through can be used is the 

responsibility of the patron. One of 

these commenters indicated that section 

199A(g)(2)(A) does not require the 

Specified Cooperative to determine the 

eligibility of all of its patrons. The 

Treasury Department and the IRS 

recognize that it may be difficult for a 

Specified Cooperative to determine the 

eligibility status of all patrons, and agree 

that the ultimate determination of 

eligibility should be made at the patron 

level. Therefore, the final regulations 

provide that a Specified Cooperative 

may pass through all, some, or none of 

the section 199A(g) deduction to all 

patrons, with appropriate adjustments 

to the section 1382 deduction 

depending on the amount passed 

through, but that only eligible taxpayers 

may claim the section 199A(g) 

deduction that is passed through. In 

considering this comment, the Treasury 

Department and the IRS also considered 

proposed § 1.199A–8(d)(5), which 

provides special rules for eligible 

taxpayers that are Specified 

Cooperatives, and that provides a 

Specified Cooperative that receives a 

section 199A(g) deduction can take the 

deduction only against patronage gross 

income and related deductions. The 

final regulations clarify the rule to be 

consistent with the nonpatronage 

disallowance for nonexempt Specified 

Cooperatives and also provide that only 

an exempt Specified Cooperative can 

take a section 199A(g) deduction passed 

through from another Specified 

Cooperative if the deduction relates to 

the patron Specified Cooperative’s 

nonpatronage gross income and related 

deductions. 

In addition to requesting that 

Specified Cooperatives not be required 

to identify the eligibility of all patrons, 

commenters requested that if a 

Specified Cooperative does obtain the 

tax status of its patrons so as not to pass 

through the section 199A(g) deduction 

to an non-eligible taxpayer, then the 

Specified Cooperative should be 

allowed to retain and use the section 

199A(g) deduction from patrons that are 

non-eligible taxpayers while passing 

through the section 199A(g) deduction 

to patrons that are eligible taxpayers, 

subject to the section 199A(g)(1)(A)(ii) 

limitation. The Treasury Department 

and the IRS intended this result in the 

Proposed Regulations and have revised 

§ 1.199A–8(d)(1) to clarify that if a 

Specified Cooperative obtains the tax 

status of a patron that is an non-eligible 

taxpayer, the Specified Cooperative may 

retain the section 199A(g) deduction 

attributable to that patron, even when 

passing through the deduction to other 

patrons. Example 11 under § 1.199A– 

8(e) has also been added to illustrate 

allocation rules for situations in which 

a Specified Cooperative retains the 


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section 199A(g) deduction attributable 

to non-eligible taxpayers. 

Another commenter also requested 

relief from the notice requirements in 

proposed § 1.199A–8(d)(3) in the event 

that a Specified Cooperative wishes to 

pass through the section 199A(g) 

deduction to patrons but does not send 

the notice before the payment period 

ends, or passes through an incorrect 

amount of the section 199A(g) 

deduction during the payment period. 

Specifically, the commenter asked if 

there is a way to issue a late notice or 

to void or otherwise reissue a notice 

after the payment period. The 

requirement of identifying the amount 

passed through during the payment 

period is from section 199A(g)(2)(A)(ii). 

Further, no administrative remedies of 

this type existed under former section 

199. The former section 199 rules 

required the notice to be provided 

during the payment period, and this 

notice worked in conjunction with the 

recapture provision in former § 1.199– 

6(k) and the no-double counting rule in 

former § 1.199–6(l). Finally, the 

payment period is also used in 

determining whether a distribution is 

deductible under section 1382(b), so a 

consistent interpretation is appropriate. 

Thus, no changes were made with 

respect to this comment. 

G. Comments on Definition of Qualified 

Payments 

Section 199A(g)(2)(E) defines 

qualified payment, with respect to any 

eligible taxpayer, as any amount which 

is (i) described in section 1385(a)(1) or 

(3), (ii) received by the taxpayer from a 

Specified Cooperative, and (iii) is 

attributable to QPAI with respect to 

which a deduction is allowed to the 

Specified Cooperative under section 

199A(g)(1). Proposed § 1.199A– 

8(d)(2)(ii) defines qualified payment as 

‘‘any amount of a patronage dividend or 

per-unit retain allocation, as described 

in section 1385(a)(1) or (3) received by 

a patron from a Specified Cooperative 

that is attributable to the portion of the 

Specified Cooperative’s QPAI, for which 

the cooperative is allowed a section 

199A(g) deduction. For this purpose, 

patronage dividends include any 

advances on patronage and per-unit 

retain allocations include per-unit 

retains paid in money during the taxable 

year. A Specified Cooperative calculates 

its qualified payment using the same 

method of accounting it uses to 

calculate its taxable income.’’ The 

inclusion of advances on patronage and 

per-unit retains paid in money during 

the taxable year is consistent with the 

definition in former § 1.199–6(e). 

The commenter asserted that when a 

Specified Cooperative’s section 199A(g) 

deduction is W–2 wage-limited under 

section 199A(g)(1)(B), section 

199A(g)(2)(E)(iii) requires qualified 

payments to reflect the limitation for 

purposes of the section 199A(b)(7) 

reduction. The commenter provided an 

example where the Cooperative’s W–2 

wage-limited section 199A(g) deduction 

is $50, but would have been $100 absent 

the W–2 wage limitation, and so the 

commenter proposed that only 50 

percent of patronage dividends (or perunit retain allocations) would be 

‘‘qualified payments’’ under section 

199A(g)(2)(E). 

The definition of qualified payment in 

former section 199 and section 199A is 

almost identical. Under former section 

199, the definition in section 

199(d)(3)(E)(iii) provided that a 

qualified payment is an amount which 

is attributable to QPAI with respect to 

which a deduction is allowed to such 

cooperative under section 199(a). 

Section 199(A)(g)(2)(E)(iii) provides the 

same except that it refers to the 

deduction allowed to such cooperative 

under section 199A(g)(1). In former 

section 199, the amount allowed under 

former section 199(a) did not consider 

the W–2 wage limitation, which was in 

section 199(b). Section 199A(g)(1) is 

organized so that section 199A(g)(1)(A) 

is equivalent to former section 199(a) 

and section 199A(g)(1)(B) is equivalent 

to former section 199(b). 

The Proposed Regulations interpreted 

the definition of qualified payment as 

referring to payments that relate to gross 

receipts that are allowable in the QPAI 

of a Specified Cooperative for which a 

deduction is allowed under section 

199A(g)(1)(A). This is consistent with 

the language used in section 

199A(g)(1)(A), which provides that there 

shall be allowed a deduction equal to 9 

percent of the lesser of (i) QPAI of the 

taxpayer for the taxable year, or (ii) the 

taxable income of the taxpayer for the 

taxable year. As relevant, this language 

parallels former section 199(a). This 

interpretation is directly supported by 

Example 1 of the Joint Committee 

Report, which illustrates that payments 

to the patron are considered qualified 

payments for purposes of the section 

199A(b)(7) reduction when the issuing 

Specified Cooperative’s section 199A(g) 

deduction was W–2 wage-limited. This 

is also consistent with the regulations 

under former section 199, which did not 

have a proportionality rule for qualified 

payments. Therefore, the final 

regulations do not incorporate this 

comment. 

Commenters also requested 

clarification that the definition of 

qualified payments does not include 

amounts paid to patrons by Specified 

Cooperatives with respect to activities 

that do not qualify as producing DPGR 

from the sale of agricultural or 

horticultural products. When gross 

receipts of a Specified Cooperative are 

non-DPGR, and thus, are not includable 

in QPAI, payments based on these 

amounts do not meet the definition of 

qualified payments. The Treasury 

Department and the IRS agree with this 

comment and view this as consistent 

with the interpretation of qualified 

payment described earlier, but do not 

consider additional regulatory language 

necessary to clarify this point. 

Commenters also suggested that the 

last sentence of the definition, 

indicating that a Specified Cooperative 

calculates its qualified payment using 

the same method of accounting it uses 

to calculate its taxable income, was 

added in error and should be removed. 

This sentence was not in the definition 

of qualified payment in former § 1.199– 

6(e), and the Treasury Department and 

the IRS have removed the sentence for 

consistency with former § 1.199–6(e). 

Further, the definition of qualified 

payments already encompasses this 

concept with its references to patronage 

dividends and per-unit retain 

allocations, as a Specified Cooperative 

calculates patronage dividends and perunit retain allocations when 

determining taxable income. 

H. Comments on Examples in Proposed 

§ 1.199A–8(e) 

Commenters requested clarification 

on Examples 1 and 2 of proposed 

§ 1.199A–8(e), asking how both 

examples are based on the same facts, 

but the payment in Example 1 is 

deemed a per-unit retain allocation, 

while the payment in Example 2 is 

deemed a purchase. Commenters 

indicated that without further 

explanation, the examples were 

confusing. Example 2 has been removed 

to eliminate any confusion as Example 

1 is consistent with Example 1 from the 

Joint Committee Report. Example 1 has 

also been slightly modified for clarity 

and to more closely track Example 1 

from the Joint Committee Report. In 

general, the determination of whether a 

payment is a per-unit retain allocation 

is made based on the definition in 

section 1388(f). Section 1388(f) defines 

per-unit retain allocations as any 

allocation, by an organization to which 

part I of subchapter T apples, to a patron 

with respect to products marketed for 

the patron, the amount of which is fixed 

without reference to the net earnings of 

the organization pursuant to an 

agreement between the organization and 


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the patron. Per-unit retain allocations 

are qualified payments (to the extent all 

other requirements are met) under the 

definition in § 1.199A–8(d)(2)(ii). 

One commenter also requested 

clarification on whether it is possible for 

a Specified Cooperative and its patrons 

to contractually agree that a payment is 

not a qualified payment. The Treasury 

Department and the IRS believe that an 

agreement to treat a payment that 

otherwise meets the definition of 

qualified payment as something else 

would be inappropriate and ineffective. 

A payment meeting the definition of a 

qualified payment should be 

characterized as a qualified payment. 

Commenters also asked that Examples 

1–3 from former § 1.199–6(m) be 

included in the final regulations. 

Similar to Example 2 of proposed 

§ 1.199A–8(e), the facts of Examples 1 

and 2 from former § 1.199–6(m) both 

treat the Cooperative payments to 

patrons as purchases rather than perunit retain allocations. In order to avoid 

confusion, the examples were modified 

to be consistent with Example 1 from 

the Joint Committee Report. The final 

regulations include Examples 1–3 from 

former § 1.199–6(m) as Examples 6, 7, 

and 8 under § 1.199A–8(e). 

I. Comments on Rules for Specific 

Cooperative Partners in Proposed 

§ 1.199A–8(f) 

Under proposed § 1.199A–8(f), a 

Specified Cooperative that is a partner 

in a partnership must determine which 

Schedule K–1 allocations (i.e., gross 

receipts and related deductions) qualify 

as DPGR and use the items to calculate 

its corresponding section 199A(g) 

deduction. A commenter noted that W– 

2 wages generated by the partnership 

should be passed on to the Specified 

Cooperative partner, relying on section 

199A(f)(1)(A)(iii) and former § 1.199– 

5(b)(1)(i). The Treasury Department and 

the IRS agree and have amended 

§ 1.199A–8(f) accordingly. Section 

1.199A–8(f) of the final regulations also 

includes the share of COGS to maintain 

consistency with former § 1.199– 

5(b)(1)(i), which allowed for the 

allocation of COGS to partners. 

A commenter also requested that if a 

partnership conducts MPGE activities 

that result in DPGR, then a Specified 

Cooperative partner in that partnership 

should be treated as if the activities 

were directly conducted by the 

Specified Cooperative. The Treasury 

Department and IRS agree with the 

comment and § 1.199A–8(f) now allows 

for two-way attribution, meaning: (1) A 

partnership’s activities alone with 

respect to an agricultural or 

horticultural product can qualify the 

gross receipts for the Specified 

Cooperative partner, and (2) a 

partnership can be attributed the 

activities of the Specified Cooperative 

partner (including those activities that a 

specified partner is attributed from 

patrons) so that the gross receipts can be 

DPGR. 

III. § 1.199A–9, Domestic Production 

Gross Receipts 

A. In General 

Section 199A(g)(3)(D) defines the term 

DPGR to mean gross receipts of a 

Specified Cooperative derived from any 

lease, rental, license, sale, exchange, or 

other disposition (collectively, a 

disposition) of any agricultural or 

horticultural product which was MPGE 

(determined after application of section 

199A(g)(4)(B)) by the Specified 

Cooperative in whole or significant part 

within the United States. DPGR does not 

include gross receipts of the Specified 

Cooperative derived from a disposition 

of land or from services. Section 

199A(g)(4)(B) treats marketing Specified 

Cooperatives as having MPGE any 

agricultural or horticultural product in 

whole or significant part within the 

United States if their patrons have done 

so. Proposed § 1.199A–9 provides rules 

for determining whether gross receipts 

are DPGR, and provides methods of 

allocating gross receipts between DPGR 

and non-DPGR. Proposed § 1.199A–9 

was based on § 1.199–3 of the former 

section 199 regulations, but also 

incorporated rules from former § 1.199– 

1(d)(1) through (3) and § 1.199–1(e). 

Former § 1.199–1(d)(1) through (3) and 

§ 1.199–1(e) relate to the allocation of 

gross receipts between DPGR and nonDPGR, determining whether an 

allocation method is reasonable, treating 

de minimis gross receipts as DPGR or 

non-DPGR, and the use of historical data 

to allocate gross receipts for certain 

multiple-year transactions. The 

Proposed Regulations were intended to 

be interpreted in a manner consistent 

with the interpretation under former 

section 199. Other than as described in 

response to the specific comments, the 

final regulations generally follow the 

Proposed Regulations. 

B. Reasonable Method of Allocating 

Gross Receipts Between DPGR and NonDPGR 

Under proposed § 1.199A–9(c)(1), 

Specified Cooperatives must use a 

reasonable method when allocating 

gross receipts between DPGR and nonDPGR. This reasonable method must be 

consistently applied from one taxable 

year to another, and must clearly reflect 

the portion of gross receipts for the 

taxable year that is DPGR and the 

portion of gross receipts that is nonDPGR. Proposed § 1.199A–9(c)(2) 

provides that if a Specified Cooperative 

has the information readily available 

and can, without undue burden or 

expense, specifically identify whether 

the gross receipts are derived from an 

item as defined in proposed § 1.199A– 

9(e)(1)(i) (and thus, are DPGR), then the 

Specified Cooperative must use that 

specific identification method to 

determine DPGR. If the Specified 

Cooperative does not have information 

readily available to specifically identify 

whether gross receipts are derived from 

an item or cannot, without undue 

burden or expense, specifically identify 

whether the gross receipts are derived 

from an item, then the Specified 

Cooperative can use a reasonable 

method. Among the seven factors listed 

for determining whether a method is 

reasonable is whether the Specified 

Cooperative applies the method 

consistently from year to year. 

A commenter observed that former 

§ 1.199–8(a) did not prevent taxpayers 

from choosing a reasonable method on 

a year-to-year basis, and that former 

§ 1.199–8(a) provided that a taxpayer’s 

change in allocating or apportioning 

items did not constitute a change in 

method of accounting to which the 

provisions of sections 446 and 481 and 

the regulations under sections 446 and 

481 apply. The Treasury Department 

and the IRS agree with the commenter 

that any change to an allocation or 

apportionment of items should not 

constitute a change in method of 

accounting to which the provisions of 

sections 446 and 481 and the 

regulations under sections 446 and 481 

apply. However, the final regulations 

maintain the rule from the Proposed 

Regulations. The Treasury Department 

and the IRS incorporated the 

‘‘consistently applied’’ requirement into 

proposed § 1.199A–9(c)(1) to be 

consistent with the section 199A(a) 

regulations, specifically § 1.199A– 

3(b)(5). Further, if a method is not 

reasonable because it no longer clearly 

reflects the gross receipts from DPGR 

and non-DPGR, the method cannot 

continue to be used. The Specified 

Cooperative must choose a new method 

that is reasonable under the facts and 

circumstances and apply it consistently 

going forward. 

The same commenter also claimed 

that former section 199 did not subject 

the ‘‘any reasonable method’’ 

determination to the § 1.199A–9(c)(2) 

factors. This is incorrect, as the 

proposed § 1.199A–9(c)(2) factors follow 

former § 1.199–1(d)(2), including the 

factor of whether the taxpayer applies 


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the method consistently from year to 

year. Therefore, the use of consistency 

as a factor (§ 1.199A–9(c)(2)) follows 

former § 1.199–1(d)(2). 

C. Interaction of MPGE Rules in 

Proposed § 1.199A–9(f)(1) With (f)(2) 

and (3) 

MPGE is defined under proposed 

§ 1.199A–9(f)(1) as manufacturing, 

producing, growing, extracting, 

installing, developing, improving, and 

creating agricultural or horticultural 

products; making agricultural or 

horticultural products out of material by 

processing, manipulating, refining, or 

changing the form of an article, or by 

combining or assembling two or more 

articles; and cultivating soil, raising 

livestock, and farming aquatic products. 

MPGE also includes storage, handling, 

or other processing activities (other than 

transportation activities) within the 

United States related to the sale, 

exchange, or other disposition of 

agricultural or horticultural products 

only if the products are consumed in 

connection with or incorporated into 

the MPGE of agricultural or 

horticultural products, whether or not 

by the Specified Cooperative. The 

Specified Cooperative (or the patron if 

§ 1.199A–9(a)(2) applies) must have the 

benefits and burdens of ownership of 

the agricultural or horticultural 

products under Federal income tax 

principles during the period the MPGE 

activity occurs in order for the gross 

receipts derived from the MPGE of the 

agricultural or horticultural products to 

qualify as DPGR. Under proposed 

§ 1.199A–9(f)(2) and (3), if a Specified 

Cooperative engages in packaging, 

repackaging, labeling, or installation of 

an agricultural or horticultural product, 

and engages in no other MPGE activity 

with respect to the agricultural or 

horticultural product, then the activities 

of packaging, repackaging, labeling, or 

installation do not qualify as MPGE 

with respect to the agricultural or 

horticultural product. 

A commenter suggested the removal 

of § 1.199A–9(f)(2) and (3) on the 

grounds that ‘‘packaging, repackaging, 

or labelling, [and] installing’’ cannot be 

distinguished from ‘‘storage, handling, 

and other processing activities’’ 

mentioned in proposed § 1.199A–9(f)(1). 

The Joint Committee Report, in 

footnote 118, citing § 1.199–3(e)(1), 

provides that gross receipts of a 

Specified Cooperative may qualify as 

DPGR so long as the Specified 

Cooperative performs storage, handling, 

or other processing activities (other than 

transportation activities) within the 

United States, provided the products are 

consumed in connection with, or 

incorporated into, the MPGE of 

agricultural or horticultural products 

(whether or not by the Specified 

Cooperative). Thus, the Proposed 

Regulations’ definition of MPGE 

included that language. However, 

§ 1.199A–9(f)(2) and (3) effectively serve 

as minimum thresholds for purposes of 

MPGE qualification under § 1.199A– 

9(f)(1). These requirements were also 

part of the former section 199 

regulations at the time of repeal (see 

former § 1.199–3(e)(2) and (3)). A logical 

reading of these paragraphs is that the 

storage, handling, and other processing 

activities that are described in § 1.199A– 

9(f)(1) are activities that are more 

extensive than those described in 

§ 1.199A–9(f)(2) and (3). Thus, the final 

regulations do not adopt this suggestion. 

Commenters requested the inclusion 

of Examples 1 and 2 of former § 1.199– 

3(e)(5) to affirm that the storage of farm 

products qualifies as MPGE. These 

examples deal with relevant fact 

patterns, but required modification to 

apply to Specified Cooperatives as the 

examples in former § 1.199–3(e)(5) 

explicitly state that all taxpayers are not 

Cooperatives. Therefore, Examples 1 

and 2, with appropriate modifications, 

have been added under § 1.199A–9(f)(5). 

IV. § 1.199A–10, Costs Allocable to 

DPGR 

Section 1.199A–10 provides guidance 

on the allocation of costs to DPGR. This 

section provides rules for allocating a 

taxpayer’s COGS, as well as other 

expenses, losses, and deductions 

properly allocable to DPGR. The 

Proposed Regulations were based on 

and follow the former section 199 

regulations in § 1.199–4. No comments 

were received on this part of the 

Proposed Regulations, and so § 1.199A– 

10 of the Proposed Regulations is 

adopted without change by the final 

regulations. 

V. § 1.199A–11, Wage Limitation 

Section 1.199A–11 provides guidance 

regarding the W–2 wage limitation on 

the section 199A(g) deduction. No 

comments were received on this part of 

the Proposed Regulations, and so 

§ 1.199A–11 of the Proposed 

Regulations is adopted without change 

by the final regulations. 

A notice of proposed revenue 

procedure, Notice 2019–27, 2019–31 

IRB, which proposed a draft revenue 

procedure providing three proposed 

methods that Specified Cooperatives 

may use for calculating W–2 wages, was 

issued concurrently with the Proposed 

Regulations. A revenue procedure is a 

statement of procedure that affects the 

rights or duties of taxpayers under the 

Code. Consistent with the general 

purpose of publishing revenue 

procedures in the Internal Revenue 

Bulletin, the methods that taxpayers 

may use for calculating W–2 wages are 

set forth in a revenue procedure to 

promote a uniform application of the 

laws administered by the IRS. The 

revenue procedure may be modified 

independently from the regulations 

under section 199A if, for example, 

changes unrelated to section 199A or 

the regulations thereunder are made to 

the underlying Form W–2, Wage and 

Tax Statement. No comments were 

received on Notice 2019–27. A revenue 

procedure that conforms with the draft, 

with one modification related to short 

taxable years, is being issued 

concurrently with the final regulations. 

VI. § 1.199A–12, Expanded Affiliated 

Group (EAG) Rules 

Proposed § 1.199A–12 provides 

guidance on the application of section 

199A(g) to an expanded affiliated group 

(EAG) that includes a Specified 

Cooperative. Section 199A(g)(5)(A)(iii) 

defines an EAG as an ‘‘affiliated group 

as defined in section 1504(a),’’ except 

that the ownership threshold is ‘‘more 

than 50 percent’’ as opposed to ‘‘at least 

80 percent.’’ Section 1504(a)(1) defines 

an affiliated group as ‘‘1 or more chains 

of includible corporations connected 

through stock ownership with a 

common parent corporation which is an 

includible corporation . . . .’’ Section 

1504(b)(1) further provides that the term 

‘‘includible corporation’’ excludes 

‘‘[c]orporations exempt from taxation 

under section 501.’’ Thus, the final 

regulations clarify that exempt Specified 

Cooperatives are not eligible to be 

members of an EAG. See § 1.1381– 

2(a)(1) (treating farmers’ cooperatives 

that are exempt from tax under section 

521 (such as Specified Cooperatives) as 

exempt organizations under section 501 

‘‘[f]or the purpose of any law that refers 

to organizations exempt from income 

taxes’’). As a result, for purposes of 

section 199A(g), an EAG may include 

nonexempt Specified Cooperatives as 

well as other includible corporations. 

The Proposed Regulations provide 

that the section 199A(g) deduction for 

an EAG is determined by separating 

patronage and nonpatronage gross 

receipts and related deductions of 

Specified Cooperatives that are 

members of the EAG. The section 

199A(g) deduction is then computed 

solely with respect to patronage gross 

receipts and related deductions 

(patronage items). As explained in part 

VII of this Summary of Comments and 

Explanation of Revisions, patronage 

items are items of income or deduction 


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produced by a transaction that actually 

facilitates the accomplishment of the 

Specified Cooperative’s marketing, 

purchasing, or services activities. See 

Farmland Industries, Inc. v. Comm’r, 78 

T.C.M. 846 (CCH) (1999); § 1.1388–1(f). 

Thus, the Proposed Regulations 

effectively have two specific rules 

addressing the computation of the 

section 199A(g) deduction for an EAG 

that includes a Specified Cooperative. 

First, the section 199A(g) deduction is 

computed using only patronage items 

(the EAG patronage limitation). Second, 

only members of an EAG that are 

Specified Cooperatives are taken into 

account in computing the section 

199A(g) deduction (the Specified 

Cooperative limitation). 

A commenter recommended that the 

final regulations eliminate the EAG 

patronage limitation. Specifically, as 

discussed in part II of this Summary of 

Comments and Explanation of 

Revisions, the commenter argued that 

the general requirement to distinguish 

income, deductions, and W–2 wages 

from patronage and nonpatronage 

activities conflicts with the policy of 

section 199A, and that such a 

requirement is equally inappropriate for 

EAGs that include Specified 

Cooperatives. 

The Treasury Department and the IRS 

do not agree with the commenter’s 

argument. Under subchapter T, 

patronage income of a nonexempt 

cooperative with both patronage and 

nonpatronage activities effectively 

receives single-level tax treatment, 

whereas nonpatronage income of such a 

cooperative is taxed at both the 

corporate level and the shareholder 

level. Farm Service Coop. v. Comm’r, 

619 F.2d 718, 723 (8th Cir. 1980). 

Because the commenter’s proposal 

would extend the benefits of the section 

199A(g) deduction to nonpatronage 

activities, with respect to which a 

nonexempt cooperative is taxed as a C 

corporation, it is inconsistent with the 

purposes and structure of section 199A. 

Moreover, eliminating the patronage 

limitation solely in the context of an 

EAG would disadvantage nonexempt 

Specified Cooperatives that are not 

members of an EAG because such 

entities, unlike their counterparts in an 

EAG, would be prohibited from taking 

a section 199A(g) deduction on 

nonpatronage sourced gross receipts. 

Thus, the final regulations do not 

adopt the commenter’s recommendation 

to compute the section 199A(g) 

deduction using both patronage and 

nonpatronage items in either the 

standalone context (see part II of this 

Summary of Comments and Explanation 

of Revisions) or for EAGs. Instead, 

activities resulting in nonpatronage 

income continue to be taxed as income 

from a noncooperative C corporation. 

The same commenter also 

recommended eliminating the Specified 

Cooperative limitation, specifically 

arguing that, because C corporations 

that are not Specified Cooperatives can 

be members of an EAG, such 

corporations also should be taken into 

account in computing the section 

199A(g) deduction for an EAG. The 

commenter also stressed that the 

approach in proposed § 1.199A–12 is 

different from the approach in the 

former section 199 EAG rules, which 

provide the basis for the rules in 

proposed § 1.199A–12. 

The final regulations also do not 

adopt this recommendation. Unlike the 

former section 199 deduction, which 

was broader in scope, section 199A(g) 

specifically provides that only a 

‘‘taxpayer which is a specified 

agricultural or horticultural 

cooperative’’ (that is, a Specified 

Cooperative) may claim the section 

199A(g) deduction. Moreover, as noted 

in part II of this Summary of Comments 

and Explanation of Revisions, C 

corporations are expressly prohibited 

under section 199A(a) from claiming a 

section 199A(a) deduction, and C 

corporations other than Specified 

Cooperatives under section 

199A(g)(2)(D)(i) from claiming a section 

199A(g) deduction as a patron of a 

Specified Cooperative. Although the 

statute does not expressly prohibit C 

corporations that are not Specified 

Cooperatives from being taken into 

account in computing an EAG’s section 

199A(g) deduction, the fact that the 

statute expressly limits this deduction 

to Specified Cooperatives, and the 

statute’s general prohibition against C 

corporations that are not Specified 

Cooperatives benefiting from the section 

199A(g) deduction, indicate that the 

Specified Cooperative limitation is 

consistent with the structure and intent 

of section 199A. 

Additionally, eliminating the 

Specified Cooperative limitation would 

have no practical effect unless the EAG 

patronage limitation also were 

eliminated. Nonexempt Specified 

Cooperatives receive single-level tax 

treatment only to the extent of patronage 

income generated and distributed to 

their patrons; their nonpatronage 

income continues to be taxed at both the 

corporate level and the shareholder 

level. Accordingly, the net effect of the 

Specified Cooperative limitation is to 

exclude what otherwise would be 

nonpatronage income, because a C 

corporation that is not a Specified 

Cooperative cannot generate patronage 

income. Because the final regulations 

retain the EAG patronage limitation, 

removing the Specified Cooperative 

limitation would have no practical 

effect with respect to nonexempt 

Specified Cooperatives. As previously 

noted, removing the Specified 

Cooperative limitation would not affect 

the treatment of exempt Specified 

Cooperatives because they are not 

eligible to be members of an EAG. See 

section 1504(b)(1); § 1.1381–2(a)(1). 

Finally, revisions necessary to clarify 

the scope and application of section 

199A(g) to an EAG that includes a 

Specified Cooperative were made in 

§ 1.199A–12 of the final regulations. 

VII. § 1.1382–3, Taxable Income of 

Cooperatives; Special Deductions for 

Exempt Farmers’ Cooperatives; and 

§ 1.1388–1, Definitions and Special 

Rules 

A. Comments on Definition of 

‘‘Patronage and Nonpatronage’’ 

Section 1.1388–1 provides definitions 

and special rules applicable to 

Cooperatives. The Proposed Regulations 

added a definition of patronage and 

nonpatronage in proposed § 1.1388–1(f). 

Proposed § 1.1388–1(f) provides 

‘‘[w]hether an item of income or 

deduction is patronage or nonpatronage 

sourced is determined by applying the 

directly related use test. The directly 

related use test provides that if the 

income or deduction is produced by a 

transaction that actually facilitates the 

accomplishment of the cooperative’s 

marketing, purchasing, or services 

activities, the income or deduction is 

from patronage sources. However, if the 

transaction producing the income or 

deduction does not actually facilitate 

the accomplishment of these activities 

but merely enhances the overall 

profitability of the cooperative, being 

merely incidental to the association’s 

cooperative operation, the income or 

deduction is from nonpatronage 

sources. Patronage and nonpatronage 

income or deductions cannot be netted 

unless otherwise permitted by the 

Internal Revenue Code or regulations 

issued under the relevant section of the 

Internal Revenue Code, or guidance 

published in the Internal Revenue 

Bulletin (see § 601.601(d)(2) of this 

chapter).’’ 

Commenters questioned the need for 

adopting a definition in connection with 

guidance under section 199A(g), as the 

definition will impact all Cooperatives. 

However, a common determination for 

all Cooperatives is identifying activities 

as patronage or nonpatronage. Prior to 

the Proposed Regulations, there was no 

single definition of patronage and 


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nonpatronage. The definition of income 

derived from sources other than 

patronage in § 1.1382–3(c)(2), which 

was often cited as part of the 

determination, is outdated. As it relates 

to section 199A(g), the requirement to 

identify patronage and nonpatronage to 

calculate the section 199A(g) deduction 

places additional importance on the 

determination. To assist taxpayers in 

distinguishing between patronage and 

nonpatronage, proposed § 1.1388–1(f) 

was added. The intent in adding 

§ 1.1388–1(f) was to incorporate the 

‘‘directly related’’ test, which is the 

current legal standard for making the 

determination. 

Commenters requested citations 

relevant to the proposed definition to 

ensure the language complies with the 

current legal standard. Other than the 

last sentence, the language adopted in 

the Proposed Regulations closely 

follows the language used in Rev. Rul. 

69–576, 1969–2 C.B. 166, which 

provides ‘‘[t]he classification of an item 

of income as from either patronage or 

nonpatronage sources is dependent on 

the relationship of the activity 

generating the income to the marketing, 

purchasing, or service activities of the 

cooperative. If the income is produced 

by a transaction which actually 

facilitates the accomplishment of the 

cooperative’s marketing, purchasing, or 

service activities, the income is from 

patronage sources. However, if the 

transaction producing the income does 

not actually facilitate the 

accomplishment of these activities but 

merely enhances the overall profitability 

of the cooperative, being merely 

incidental to the association’s 

cooperative operation, the income is 

from nonpatronage sources.’’ 

The language from Rev. Rul. 69–576 

has been cited in numerous opinions, 

including Farmland Industries, Inc. v. 

Comm’r, 78 T.C.M. 846 (CCH) (1999), 

which provides a summary of published 

guidance and many of the cases relevant 

to the current legal standard. In the 

Farmland opinion, the court states that 

‘‘the ‘directly related test’ applied by the 

courts is traceable to published rulings 

issued by the Commissioner, such as 

Rev. Rul. 69–576, 1969–2 C.B. 166, and 

Rev. Rul. 74–160, 1974–1 C.B. 245, that 

interpreted patronage income broadly.’’ 

Farmland at 865. 

Commenters also suggested removal 

of § 1.1388–1(f) on the basis that 

patronage/nonpatronage determinations 

necessitate a facts and circumstances 

analysis, and, therefore § 1.1388–1(f) is 

inappropriate. Section 1.1388–1(f) 

provides a definition, it does not 

eliminate the necessity for factual 

analysis. Therefore, the final regulations 

do not adopt this comment. 

Alternatively, one commenter 

requested that the definition in 

§ 1.1388–1(f) be modified to provide 

that income is from patronage sources if 

the underlying transaction is either 

directly related or actually facilitates the 

cooperative’s purpose. The final 

regulations do not adopt this comment. 

The definitional language of § 1.1388– 

1(f) follows the language from Rev. Rul. 

69–576 and is also consistent with 

language in Farmland. However, 

revisions have been made to clarify the 

distinction between patronage and 

nonpatronage sourced items. 

The commenter also suggested the 

removal of the last sentence of the 

definition, which prohibited the netting 

of patronage and nonpatronage items. 

The Treasury Department and the IRS 

agree that the ‘‘netting’’ rule is not 

needed to define patronage and 

nonpatronage. Therefore, the last 

sentence of proposed § 1.1388–1(f) is 

removed from the definition in the final 

regulations. 

B. Comments on Removing the 

Definition of ‘‘Income From Sources 

Other Than Patronage’’ 

The commenter also requested that if 

a definition was finalized, then the 

definition of income from sources other 

than patronage in § 1.1382–3(c)(2) be 

removed. The Treasury Department and 

the IRS agree that this section should be 

revised. The final regulations revise this 

section so that it now cross-references 

the definition of patronage and 

nonpatronage in § 1.1388–1(f). 

VIII. Removal of Section 199 

Regulations 

In light of the TCJA, the Treasury 

Department and the IRS proposed to 

remove the former section 199 

regulations (§§ 1.199–0 through 1.199– 

9) and withdrew the 2015 proposed 

regulations because the regulations 

interpret a provision of the Code that 

has been repealed for taxable years 

beginning after December 31, 2017. No 

comments were received, and the final 

regulations remove the former section 

199 final regulations (§§ 1.199–0 

through 1.199–9, including expired 

temporary regulations published in the 

Federal Register as TD 9731). 

The removal of these regulations is 

unrelated to the substance of the rules 

in the regulations, and no negative 

inference regarding the stated rules 

should be made. The regulations are 

removed from the Code of Federal 

Regulations (CFR) solely because they 

have no future applicability. Removal of 

these regulations is not intended to alter 

any non-regulatory guidance that cites 

to or relies upon these regulations. 

These regulations as contained in 26 

CFR part 1, revised April 1, 2019, 

remain applicable to determining 

eligibility for the former section 199 

deduction for any taxable year that 

began before January 1, 2018. The 

beginning date of the taxable year of a 

partnership, S corporation, or a nongrantor trust or estate, rather than the 

taxable year of a partner, shareholder, or 

beneficiary is used to determine items 

that are taken into account for purposes 

of calculating a former section 199 

deduction. 

IX. Comments on Proposed 

Applicability Date and Transition Rule 

A commenter requested that the final 

regulations be made applicable to 

taxable years beginning after the 

publication date. The final regulations 

adopt the commenter’s request. 

Regarding the transition rule, 

proposed § 1.199A–7(h)(2) provides that 

no deductions under section 199A are 

allowed to patrons for any qualified 

payments that are attributable to QPAI 

with respect to which a deduction is 

allowable to the Specified Cooperative 

under former section 199 as in effect on 

and before December 31, 2017, for a 

taxable year of the Cooperative 

beginning before January 1, 2018. 

Additionally proposed § 1.199A–7(h)(3) 

provides that if a patron of a 

Cooperative cannot claim a deduction 

under section 199A(a) for any qualified 

payments described in the transition 

rule of § 1.199A–7(h)(2), the Cooperative 

must report this information on an 

attachment to or on the Form 1099– 

PATR (or any successor form) issued by 

the Cooperative to the patron, unless 

otherwise provided by the instructions 

to the form. 

The commenter also requested 

omission of references to the transition 

rule and confirmation that any 

reasonable application of the transition 

rule will be deemed appropriate. This 

request was based on the presumption 

that these regulations would not be 

finalized until after 2019, when the time 

period covered by the transition rule has 

passed, thus requiring the amendment 

of Forms 1099–PATR (and 

corresponding Forms 1040, U.S. 

Individual Income Tax Return). The 

commenter also suggested that 

Cooperatives have a common 

understanding of the transition rule to 

the extent that payments described 

under proposed § 1.199A–7(h)(2) would 

be properly identified and not included 

in patrons’ section 199A(a) calculations. 

The commenter, however, did not 

identify a specific method that 


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Cooperatives primarily used. The final 

regulations amend the rule from 

proposed § 1.199A–7(h)(2) so that it 

now only cross-references section 101(c) 

of Division T of the 2018 Act. The final 

regulations also amend proposed 

§ 1.199A–7(h)(3) to allow Cooperatives 

to use a reasonable method to identify 

the payments, and state that the method 

from the Proposed Regulations of 

reporting on an attachment to or on 

Form 1099–PATR (or successor form) is 

one reasonable method. 

Applicability Dates 

Section 7805(b)(1)(A) and (B) of the 

Code generally provide that no 

temporary, proposed, or final regulation 

relating to the internal revenue laws 

may apply to any taxable period ending 

before the earliest of (A) the date on 

which the regulation is filed with the 

Federal Register, or (B) in the case of a 

final regulation, the date on which a 

proposed or temporary regulation to 

which the final regulation relates was 

filed with the Federal Register. 

Consistent with authority provided by 

section 7805(b)(1)(A), §§ 1.199A–7 

through 1.199A–12, § 1.1382–3(c)(2) as 

revised, and § 1.1388–1(f) generally 

apply to taxable years beginning after 

January 19, 2021. However, taxpayers 

may choose to apply the rules set forth 

in §§ 1.199A–7 through 1.199A–12, 

§ 1.1382–3(c)(2) as revised, and 

§ 1.1388–1(f) for taxable years beginning 

on or before January 19, 2021, provided, 

in each case, the taxpayers follow the 

rules in their entirety and in a 

consistent manner. Alternatively, 

taxpayers may rely on the proposed 

regulations under §§ 1.199A–7 through 

1.199A–12 issued on June 19, 2019 for 

taxable years beginning on or before 

January 19, 2021 and taxpayers may rely 

on the proposed regulations under 

§ 1.1388–1(f) issued on June 19, 2019 for 

taxable years beginning on or before 

January 19, 2021, provided, in each 

case, taxpayers follow the proposed 

regulations in their entirety and in a 

consistent manner. 

Special Analyses 

I. Regulatory Planning and Review— 

Economic Analysis 

Executive Orders 13771, 13563 and 

12866 direct agencies to assess costs and 

benefits of available regulatory 

alternatives and, if regulation is 

necessary, to select regulatory 

approaches that maximize net benefits 

(including potential economic, 

environmental, public health and safety 

effects, distributive impacts, and 

equity). Executive Order 13563 

emphasizes the importance of 

quantifying both costs and benefits, of 

reducing costs, of harmonizing rules, 

and of promoting flexibility. 

These regulations have been 

designated by the Office of Management 

and Budget’s Office of Information and 

Regulatory Affairs (OIRA) as subject to 

review under Executive Order 12866 

pursuant to the Memorandum of 

Agreement (April 11, 2018) between the 

Treasury Department and the Office of 

Management and Budget regarding 

review of tax regulations. OIRA has 

determined that the final rulemaking is 

significant and subject to review under 

Executive Order 12866 and section 1(b) 

of the Memorandum of Agreement. 

Accordingly, the final regulations have 

been reviewed by the Office of 

Management and Budget. 

A. Background and Overview 

The TCJA repealed section 199 of the 

Code, which provided a deduction for 

income attributable to domestic 

production activities. In its place it 

created section 199A, which provides a 

deduction for qualified business income 

derived from passthrough businesses— 

such as sole proprietorships, 

partnerships, and S corporations— 

engaged in domestic trades or 

businesses. While the repealed section 

199 deduction was generally available 

to all taxpayers, the section 199A(a) 

deduction is available only to taxpayers 

other than C corporations, including 

patrons of cooperatives to which 

sections 1381 through 1388 of the Code 

apply (Cooperatives). On March 23, 

2018, section 101 of the 2018 Act 

amended section 199A(g) to provide 

deductions for Specified Cooperatives 

and their patrons that are substantially 

similar to the deductions allowed under 

the repealed section 199 deduction. 

Accordingly, these regulations generally 

formalize prior and current practices 

based on the rules under former section 

199. The 2018 Act also added section 

199A(b)(7), which requires patrons of 

Specified Cooperatives to reduce their 

section 199A(a) deduction if those 

patrons receive qualified payments from 

Specified Cooperatives. 

The estimated number of 

Cooperatives affected by the 2018 Act 

and these final regulations is 9,200, 

including approximately 2,000 

Specified Cooperatives, based on 2018 

tax filings. 

B. Need for Regulation 

The final regulations provide 

guidance regarding the application of 

sections 199A(a), 199A(b)(7), and 

199A(g) to Cooperatives, Specified 

Cooperatives, and their patrons. The 

final regulations are needed because the 

2018 Act introduced a number of terms 

and calculations. Patrons, Cooperatives, 

and Specified Cooperatives would 

benefit from greater specificity regarding 

these and other items. 

C. Economic Analysis 

1. Baseline 

The Treasury Department and the IRS 

have assessed the benefits and costs of 

the final regulations relative to a noaction baseline reflecting anticipated 

Federal income tax-related behavior in 

the absence of these regulations. 

2. Economic Rationale for Issuing 

Guidance for the 2018 Act 

The Treasury Department and the IRS 

anticipate that the issuance of guidance 

pertaining to sections 199A(a), 

199A(b)(7), and 199A(g) of the 2018 Act 

to Cooperatives, Specified Cooperatives, 

and their patrons will provide a 

marginal net economic benefit to the 

overall U.S. economy. 

The final regulations clarify a number 

of concepts for Cooperatives and their 

patrons, regarding the deduction 

provided by section 199A(a) for 

qualified business income, as well as for 

Specified Cooperatives and their 

patrons regarding the section 199A(g) 

deduction on income attributable to the 

domestic production activities of 

Specified Cooperatives. Specifically, the 

final regulations (i) clarify how 

Specified Cooperatives should 

determine their section 199A(g) 

deduction; (ii) define ‘‘agricultural or 

horticultural products’’ to clarify which 

Cooperatives qualify as Specified 

Cooperatives eligible for the section 

199A(g) deduction; (iii) provide de 

minimis rules reducing compliance 

costs for certain Specified Cooperatives; 

(iv) require reporting from Cooperatives; 

(v) provide a safe harbor permitting 

certain patrons of Specified 

Cooperatives to use a simpler method to 

calculate the section 199A(b)(7) 

reduction to the section 199A(a) 

deduction; (vi) permit patrons to 

allocate their expenses to calculate the 

correct amount of qualified business 

income and their section 199A(a) 

deduction; (vii) permit, but do not 

require, Specified Cooperatives to 

identify the eligibility status of patrons 

to pass through the section 199A(g) 

deduction to them; and (viii) permit 

partnerships to pass through W–2 wages 

and cost of goods sold (COGS) to 

Specified Cooperative partners and 

permit attribution of a partnership’s 

activities to a Specified Cooperative 

partner and a Specified Cooperative’s 

partner’s activities to a partnership. In 

the absence of guidance, affected 


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taxpayers would have to calculate their 

tax liability without the definitions and 

clarifications provided by the final 

regulations, a situation that is generally 

considered more burdensome and could 

lead to greater conflicts with tax 

administrators. Thus, the Treasury 

Department and the IRS project that the 

final regulations will marginally reduce 

taxpayer compliance burden and the 

costs of tax administration relative to 

not issuing any such guidance. 

This guidance also ensures that 

section 199A deductions are calculated 

similarly across taxpayers, avoiding 

situations where one taxpayer receives 

preferential treatment over another for 

fundamentally similar economic 

activity. For example, in the absence of 

these final regulations, a Specified 

Cooperative may have uncertainty over 

what type of income is eligible for the 

section 199A(g) deduction. If a 

Specified Cooperative claimed the 

section 199A(g) deduction on income 

that is taxed similarly to a C 

corporation, this would confer an 

unintended economic benefit to the 

Specified Cooperative over other C 

corporations performing identical 

activities that only benefit from a lower 

corporate tax rate. As discussed further 

below, this guidance prevents the 

introduction of distortions of economic 

decisions in the agricultural or 

horticultural sector. 

In the absence of these regulations, 

uncertainty over statutory interpretation 

could lead to economic losses to the 

extent that taxpayers interpret the 

statute in ways that are inconsistent 

with the statute’s intents and purposes. 

For example, a Specified Cooperative 

may pursue a project involving a certain 

product that is only profitable if that 

product is deemed ‘‘agricultural or 

horticultural’’ and thus eligible for the 

section 199A(g) deduction. If, in fact, 

this product is ineligible for the 

deduction based on the intents and 

purposes of the statute, then the project 

should not have been pursued and this 

results in an economic loss. 

Alternatively, without a definition of 

‘‘agricultural or horticultural,’’ a 

Specified Cooperative may incorrectly 

assume that a project is not eligible for 

the deduction and not pursue the 

project, which could also result in an 

economic loss. In such cases, guidance 

provides value by supporting decisionmaking that is economically efficient, 

contingent on the overall Code. While 

no guidance can fully curtail all 

inaccurate interpretations of the statute, 

the final regulations significantly 

mitigate the chance for such 

interpretations and thereby increase 

economic efficiency. Due to the lack of 

readily available data, the Treasury 

Department and the IRS have not 

estimated the increase in United States 

economic activity that would arise from 

the guidance. 

The Treasury Department further 

projects that the issuance of guidance 

will reduce taxpayer compliance burden 

and the costs of tax administration 

relative to a no-action baseline. Due to 

the lack of readily available data, the 

Treasury Department has not estimated 

the decrease in taxpayer compliance 

burden nor tax administration costs 

arising from the issuance of guidance. 

No comments were received on the 

economic analysis provided in the 

proposed regulations. 

3. Economic Analysis of Specific 

Provisions 

The final regulations embody certain 

regulatory decisions that reflect 

necessary regulatory discretion. These 

decisions specify more fully how the 

2018 Act is to be implemented. 

i. Determining Section 199A(g) 

Deduction for Specified Cooperatives 

The final regulations outline the 

process by which Specified 

Cooperatives calculate their section 

199A(g) deductions. The rules concern 

two types of Specified Cooperatives, 

those that are exempt (qualified as a 

Cooperative under section 521) and 

those that are nonexempt (qualified 

under subchapter T of the Code), and 

two sources of income, patronage and 

nonpatronage. The patronage and 

nonpatronage income of Specified 

Cooperatives is taxed differently 

depending on whether the Specified 

Cooperative is exempt or nonexempt. In 

the case of exempt Specified 

Cooperatives, patronage and 

nonpatronage source income is subject 

to a single level of tax at the patron 

level. Whereas, for nonexempt Specified 

Cooperatives only patronage source 

income is subject to a single level of tax 

at the patron level; nonpatronage source 

income is subject to a double level of 

tax, similar to other C corporation 

income. 

Because the Code does not define 

patronage and nonpatronage sourced 

items, § 1.1388–1(f) of these final 

regulations sets forth a definition that is 

consistent with the current state of 

federal case law. Specifically, the 

definition adopts the directly related 

test, which is a fact specific test for 

determining whether income and 

deductions of a Cooperative are 

patronage or nonpatronage. The final 

regulations also make revisions to 

clarify patronage versus nonpatronage 

items. In response to a commenter, the 

final regulations remove the last 

sentence in the proposed definition, 

because the Treasury Department and 

the IRS agree that the sentence is not 

needed to define patronage and 

nonpatronage. Specifying a definition 

that is consistent with current case law 

will help to minimize the economic 

impacts of these regulations that may 

arise from lack of clarity. 

The final regulations adopt the 

proposed rule requiring Specified 

Cooperatives to identify gross receipts, 

COGS, deductions, W–2 wages, etc. as 

patronage or nonpatronage, and only 

allows the patronage activities of 

nonexempt Specified Cooperatives to be 

included in the calculation of the 

section 199A(g) deduction, unless the 

Specified Cooperative falls under the 

expanded de minimis rules, which are 

discussed later. The TCJA reduced the 

corporate tax rate for C corporations 

under section 11 and provided the 

section 199A deduction for domestic 

businesses operating as sole 

proprietorships or through partnerships, 

S corporations, trusts, or estates. The 

TCJA also repealed section 199, which 

did not preclude deductions on income 

earned by C corporations. The 2018 Act 

amended section 199A to address 

concerns that the TCJA created an 

unintended incentive for farmers to sell 

their agricultural or horticultural 

products to Specified Cooperatives over 

independent buyers. Specifically, the 

2018 Act amended section 199A(g) to 

allow Specified Cooperatives and their 

patrons a deduction similar to the 

former section 199 deduction. Because 

the section 199A(g) deduction is not 

intended to benefit C corporations and 

their shareholders, in general, the final 

regulations specify that the section 

199A(g) deduction can be claimed only 

on income that can be subject to tax 

only at the patron level. Under the final 

regulations, a non-exempt Specified 

Cooperative may not claim the section 

199A(g) deductions on income that 

cannot be paid to patrons and deducted 

under section 1382(b) and exempt 

Specified Cooperatives may not claim 

section 199A(g) deductions on income 

that cannot be paid to patrons and 

deducted under sections 1382(b) or 

1382(c)(2). 

In the absence of these regulations, a 

Specified Cooperative may have 

uncertainty as to whether nonpatronage 

source income, which would be taxed in 

the same manner as a C corporation, 

could receive both the lower corporate 

tax rate and be further offset by a section 

199A(g) deduction. Other C 

corporations performing identical 

activities would only benefit from the 

lower corporate tax rate. This would 


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confer an unintended economic benefit 

to Specified Cooperatives over other C 

corporations and undermine the intent 

of the 2018 Act’s amendments of section 

199A to reduce competitive distortions 

between C corporations and Specified 

Cooperatives. 

The Treasury Department and the IRS 

have determined that this potential 

uncertainty as to tax treatment could 

distort economic decisions in the 

agricultural or horticultural sector. The 

final regulations avoid this outcome, 

promoting a more efficient allocation of 

resources by providing more uniform 

incentives across taxpayers. 

ii. Definition of Agricultural or 

Horticultural Products 

The section 199A(g) deduction is 

focused solely on dispositions of 

agricultural or horticultural products. 

As a result, the Treasury Department 

and the IRS determined that it was 

necessary to provide a definition. 

Because there is no definition of 

agricultural or horticultural products in 

the Code or Income Tax Regulations, the 

Treasury Department and the IRS 

looked to the United States Department 

of Agriculture (USDA) for definitions 

because the USDA has expertise 

concerning Specified Cooperatives, and 

Specified Cooperatives are likely 

familiar with USDA law. The proposed 

regulations defined agricultural or 

horticultural products within the 

meaning of the Cooperative Marketing 

Act of 1926 as agricultural, 

horticultural, viticultural, and dairy 

products, livestock and the products 

thereof, the products of poultry and bee 

raising, the edible products of forestry, 

and any and all products raised or 

produced on farms and processed or 

manufactured products thereof. 

Agricultural or horticultural products 

also include aquatic products that are 

farmed as well as fertilizer, diesel fuel, 

and other supplies used in agricultural 

or horticultural production that are 

manufactured, produced, grown, or 

extracted by the Specified Cooperative. 

Agricultural or horticultural products, 

however, do not include intangible 

property, since agricultural or 

horticultural products were considered 

a subset of tangible property under 

former section 199. Intangible property 

(defined in § 1.199–3(j)(2)(iii)) was a 

separate category of property and gross 

receipts from intangible property did 

not qualify as domestic production gross 

receipts (DPGR). 

The final regulations made clarifying 

changes to the definition of agricultural 

or horticultural products in response to 

commenters. The final regulations 

provide examples (without limitation) 

of products that are considered 

agricultural or horticultural products, 

including specific agricultural or 

horticultural products, livestock 

products, edible forestry products, and 

farmed aquatic products. The final 

regulations also provide language 

further clarifying that agricultural or 

horticultural products do not include 

intangible property. Finally, the final 

regulations include more examples of 

‘‘other supplies’’ being agricultural or 

horticultural products. 

The Treasury Department and the IRS 

considered a similar but alternative 

definition of agricultural or 

horticultural products within the 

meaning of the Agricultural Marketing 

Act of 1946 as agricultural, 

horticultural, viticultural, and dairy 

products, livestock and poultry, bees, 

forest products, fish and shellfish, and 

any products thereof, including 

processed and manufactured products, 

and any and all products raised or 

produced on farms and any processed or 

manufactured product thereof. While 

very similar to the definition in the 

rules adopted in these final regulations, 

the rules under the Agricultural 

Marketing Act of 1946 concern the 

marketing and distribution of 

agricultural products without reference 

to Cooperatives. 

The Treasury Department and the IRS 

also considered an alternative definition 

of agricultural or horticultural products 

based on the definition of agricultural 

commodities within the meaning of 

general regulations under the 

Commodity Exchange Act. The Treasury 

Department and the IRS concluded that 

this definition was too narrow, because 

it is limited to products that can be 

commodities. The use of this narrow 

definition would have restricted the 

range of products for which the section 

199A(g) deduction would be otherwise 

available. 

The Treasury Department and the IRS 

did not attempt to provide quantitative 

estimates of the economic consequences 

of different designations of agricultural 

or horticultural products because 

suitable data are not readily available at 

this level of detail. 

iii. De Minimis Threshold for Domestic 

Production Gross Receipts of Specified 

Cooperatives 

In general, § 1.199A–9 of the final 

regulations requires that Specified 

Cooperatives allocate gross receipts 

between DPGR and non-DPGR. 

However, § 1.199A–9(c)(3) of the 

proposed regulations includes a de 

minimis provision that allows Specified 

Cooperatives to allocate total gross 

receipts to DPGR if less than 5 percent 

of total gross receipts are non-DPGR or 

to allocate total gross receipts to nonDPGR if less than 5 percent of total gross 

receipts are DPGR. The thresholds 

provided in the proposed regulations 

are based on the thresholds set forth in 

§ 1.199–1(d)(3) under former section 

199. The Treasury Department and the 

IRS chose to include a de minimis rule 

to reduce compliance costs and simplify 

tax filing relative to an alternative of no 

de minimis rule. 

The Treasury Department and the IRS 

considered changes to the de minimis 

provisions in the proposed regulations, 

but determined that materially changing 

these rules from provisions that were 

previously available would lead to 

taxpayer confusion. The final 

regulations generally maintain the rules 

of the proposed regulations, but increase 

the threshold. Thus, under § 1.199A– 

9(c)(3) of the final regulations, Specified 

Cooperatives when calculating the 

patronage section 199A(g) deduction 

may allocate total gross receipts to 

DPGR if less than 10 percent of total 

gross receipts are non-DPGR (which 

now can include nonpatronage gross 

receipts as well as patronage non-DPGR 

pursuant to § 1.199A–8(b)(2)(ii)), or 

alternatively, may allocate total gross 

receipts to non-DPGR if less than 10 

percent of total gross receipts are DPGR. 

The de minimis threshold modestly 

reduces compliance costs for businesses 

with relatively small amounts of nonDPGR or DPGR by allowing them to 

avoid allocating receipts between DPGR 

and non-DPGR activities. The de 

minimis threshold is unlikely to create 

any substantial effects on market 

activity because any change in the ratio 

of DPGR to non-DPGR will be localized 

around the threshold, meaning that the 

movement will be a small fraction of 

receipts to get below the de minimis 

threshold. Because the de minimis 

provision exempts taxpayers from 

having to perform certain allocations 

and therefore reporting these 

allocations, the Treasury Department 

and the IRS do not have information on 

taxpayers’ use of this exemption under 

former section 199 to perform a 

quantitative analysis of the impacts of 

the de minimis provision. 

iv. Reporting Requirements for 

Cooperatives 

Final regulations § 1.199A–7(c) and 

(d) provide that, when a patron 

conducts a trade or business that 

receives distributions from a 

Cooperative, the Cooperative is required 

to provide the patron with qualified 

items of income, gain, deduction, and 

loss and specified service trade or 

business (SSTB) determinations with 


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respect to those distributions. This 

increases the compliance burden on 

such Cooperatives. However, in the 

absence of these regulations, the burden 

for determining of the amount of 

distributions from a Cooperative that 

constitute qualified items of income, 

gain, deduction, and loss from a nonSSTB and an SSTB would lie with the 

patron. Because patrons are less well 

positioned to acquire the relevant 

information to determine whether 

distributions from a Cooperative are 

qualified items of income, gain, 

deduction, and loss and whether items 

that would otherwise qualify are from 

an SSTB, the Treasury Department and 

the IRS expect that these regulations 

will reduce overall compliance costs 

relative to an alternative approach of not 

introducing a reporting requirement. 

After consideration of comments, the 

reporting requirements of Cooperatives 

have been modified to simplify the 

Cooperatives’ reporting obligations in 

order to balance the burden on the 

Cooperatives and the patrons’ need to 

receive information to determine their 

section 199A(a) deduction. 

v. Allocation Safe Harbor 

If a patron receives both income or 

gain related to qualified payments and 

income or gain that is not related to 

qualified payments in a qualified trade 

or business, the patron must allocate 

those items and related deductions, 

losses, and W–2 wages using a 

reasonable method based on all of the 

facts and circumstances. The final 

regulations provide a safe harbor that 

allows patrons who receive income or 

gain related to qualified payments in 

addition to income or gain that is not 

related to qualified payments to use a 

simpler method to allocate deductions, 

losses, and W–2 wages between income 

or gain related to qualified payments 

and income or gain that is not related to 

qualified payments to calculate the 

section 199A(b)(7) reduction to the 

section 199A(a) deduction. The safe 

harbor allocation method allows patrons 

to allocate by ratably apportioning 

deductions, losses, and W–2 wages 

based on the proportion that the amount 

of income or gain related to qualified 

payments bears to the total income or 

gain used to determine QBI. This safe 

harbor is available to patrons with 

taxable incomes below the threshold 

amounts set forth in section 199A(e)(2). 

The Treasury Department and the IRS 

considered an alternative of not 

allowing a safe harbor but determined 

that a safe harbor could reduce 

compliance costs and simplify tax filing. 

The threshold was set at amounts set 

forth in section 199A(e)(2) to avoid a 

proliferation of thresholds applicable to 

taxpayers claiming a section 199A(a) 

deduction. Because the threshold 

amounts are relatively low, the Treasury 

Department and the IRS expect that the 

safe harbor would not distort business 

decisions or reduce revenue to any 

meaningful extent. 

i. Patrons May Allocate Expenses to 

Specified Service Trade or Business 

Items of Income Reported by 

Cooperative 

A commenter asked the Treasury 

Department and the IRS to revise 

proposed reporting requirements in 

circumstances where a Cooperative 

engages in a specified service trade or 

business (SSTB) business with patrons. 

In response to the commenter’s request, 

the final regulations allow patrons to 

allocate expenses between qualified 

trade or business income and any SSTB 

income received from the Cooperative 

up to the amount of the income from the 

SSTB. The final regulations more 

accurately track the substance of the 

transaction. In the absence of these 

regulations, the patron may calculate 

lower qualified business income, 

resulting in a lower section 199A(a) 

deduction. 

ii. Specified Cooperatives May Pass 

Through All, Some, or None of the 

Section 199A(g) Deduction 

Section 199A(g) permits Specified 

Cooperatives to pass through their 

section 199A(g) deduction, and allows 

eligible taxpayers to claim the 

deduction passed through. The 

proposed regulations required Specified 

Cooperatives to identify whether the 

patrons are eligible taxpayers and only 

pass through the deduction to those 

patrons. Commenters requested that the 

rule be modified so that patrons, and 

not Specified Cooperatives, have to 

identify whether the patrons are eligible 

taxpayers for purposes of using the 

section 199A(g) deduction. The rules 

have been modified in the final 

regulations to provide Specified 

Cooperatives with maximum flexibility. 

If a Specified Cooperative does not 

identify the eligibility status of all of its 

patrons, it may pass through all, some, 

or none of the section 199A(g) 

deduction. Only patrons that are eligible 

taxpayers may use the section 199A(g) 

deduction passed through to them. If a 

Specified Cooperative does determine 

the eligibility status of its patrons, it has 

the discretion to retain the section 

199A(g) deduction attributable to any 

ineligible taxpayer, and pass out the 

remainder to eligible taxpayers. 

In the absence of these regulations, a 

Specified Cooperative may have 

uncertainty as to whether to distribute 

the section 199A(g) deduction to eligible 

taxpayers. The final regulations provide 

Specified Cooperatives with the option 

of retaining and using the amounts 

equal to the section 199A(g) deduction 

attributable to ineligible taxpayers, or 

passing out the deduction, which only 

eligible taxpayers may claim. This 

allows Specified Cooperatives to choose 

whether to engage in information 

gathering regarding patrons’ eligibility 

to use the deduction. The Treasury 

Department and the IRS have 

determined that this increased 

flexibility promotes a more efficient 

allocation of resources by allowing 

Specified Cooperatives to choose the 

extent to which they engage in 

information gathering in relation to the 

use of the section 199A(g) deduction at 

the Specified Cooperative level or the 

patron level. 

iii. Special Rule for Specified 

Cooperative Partners 

The final regulations provide special 

rules for Specified Cooperatives that are 

partners in a partnership. A commenter 

recommended that the proposed 

regulations be modified to permit 

partnerships to pass through W–2 wages 

to Specified Cooperative partners, 

thereby increasing the Specified 

Cooperatives’ section 199A(g) 

deduction. A commenter also 

recommended that, to the extent a 

partnership conducts activities that 

result in gross receipts, a Specified 

Cooperative partner in that partnership 

should be permitted to treat those 

activities as conducted directed by the 

Specified Cooperative. The Treasury 

Department and the IRS agree with 

these comments. The final regulations 

permit the partnerships to pass through 

W–2 wages and COGS to Specified 

Cooperative partners. Additionally, the 

final regulations allow for two-way 

attribution, meaning: (1) A partnership’s 

activities alone with respect to an 

agricultural or horticultural product can 

qualify as gross receipts for the 

Specified Cooperative partner and (2) a 

partnership can be attributed the 

activities of the Specified Cooperative 

partner. These rules permit additional 

activities and the resulting income, as 

well as additional W–2 wages and 

COGS, to be considered in the 

calculation of the section 199A(g) 

deduction. 

This stipulation allows for greater 

flexibility in determining deductions 

when Specified Cooperatives are 

partners. Flexibility will increase 

economic efficiency by making it more 

likely that Specified Cooperatives 


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Federal Register / Vol. 86, No. 11 / Tuesday, January 19, 2021 / Rules and Regulations 5565 

comply with regulations by lowering the 

compliance burden. 

The Treasury Department and the IRS 

anticipate that these regulations in 

aggregate will have a marginal impact 

on economic activity. Compared to the 

economic impacts resulting from the 

2018 Act, the final regulations’ primary 

impact will be through increasing 

comprehension of the tax code. 

Increased understanding will reduce the 

risk that firms and the IRS will disagree 

on tax reporting and allocation and 

therefore engage in costly legal 

transactions. Increased comprehension 

will also reduce the possibility that 

firms will engage in activities that 

would yield negative economic impacts 

if clarity were stronger. These final 

regulations also respond to commenters 

by adding additional examples to 

further increase comprehension. 

II. Paperwork Reduction Act 

The collection of information 

contained in these regulations has been 

revised and approved by the Office of 

Management and Budget for review in 

accordance with the Paperwork 

Reduction Act of 1995 (44 U.S.C. 3507) 

under control numbers 1545–0118 and 

1545–0123. 

Regulations in § 1.199A–7(c)(3), 

(d)(3), (f)(3), and (h)(3), as well as 

§ 1.199A–8(d)(3) and (f), require the 

collection of information. The 

collections of information in § 1.199A– 

7(c)(3), (d)(3), (f)(3), and (h)(3), as well 

as § 1.199A–8(d)(3) will be conducted 

through Form 1099–PATR, Taxable 

Distributions Received From 

Cooperatives, while the collection of 

information in § 1.199A–8(f) will be 

conducted through Schedule K–1 to 

Form 1065, U.S. Return of Partnership 

Income. 

A. Collections of Information Conducted 

Through Form 1099–PATR 

Section 1.199A–7(c)(3) requires the 

Cooperative to inform its patron of the 

amount of any distribution to the patron 

that constitutes qualified items of 

income, gain, deduction, and loss from 

a non-specified service trade or business 

(SSTB) conducted directly by the 

Cooperative. Not all distributions to 

patrons are qualified items of income, 

gain, deduction, and loss because the 

source of the distribution may not be 

effectively connected with the conduct 

of a trade or business within the United 

States or may include interest income 

that is not properly allocable to the 

patron’s trade or business. The 

Cooperative directly conducting the 

trade or business from which the 

distribution to the patron originates is in 

the best position to know how much of 

the distribution is qualified items of 

income, gain, deduction, and loss. The 

Cooperative is also in the best position 

to know if it is generating income from 

an SSTB. Accordingly, the collection of 

information is necessary for the patron 

to calculate correctly the patron’s 

section 199A(a) deduction for the 

patron’s trade or business. 

Section 1.199A–7(d)(3) requires the 

Cooperative to inform its patron of the 

amount of any distributions to the 

patron that constitutes qualified items of 

income, gain, deduction, and loss from 

an SSTB conducted directly by the 

Cooperative. Accordingly, the collection 

of information is necessary for the 

patron to correctly calculate the patron’s 

section 199A(a) deduction for the 

patron’s qualified trade or business. 

The collection of information in 

§ 1.199A–7(f)(3) is essential for the 

eligible taxpayer’s calculation of the 

reduction in the eligible taxpayer’s 

section 199A(a) deduction for the 

eligible taxpayer’s trade or business that 

is required by section 199A(b)(7). 

Section 199A(g)(2)(A) requires the 

Specified Cooperative to identify the 

amount of qualified payments being 

distributed to an eligible taxpayer and 

identify the portion of the section 

199A(g) deduction allowed in a notice 

mailed to the eligible taxpayer during 

the payment period described in section 

1382(d). Section 199A(b)(7) provides 

that an eligible taxpayer who receives 

qualified payments from a Specified 

Cooperative must reduce the eligible 

taxpayer’s section 199A(a) deduction by 

an amount set forth in this section. 

Without the notice described in 

§ 1.199A–7(f)(3), the eligible taxpayer 

cannot calculate the reduction required 

by section 199A(b)(7). 

The collection of information in 

§ 1.199A–8(d)(3) is necessitated by 

section 199A(g)(2)(A). Section 

199A(g)(2)(A) permits a Specified 

Cooperative to pass through an amount 

of its section 199A(g) deduction to an 

eligible taxpayer. The amount of the 

section 199A(g) deduction that the 

Specified Cooperative is permitted to 

pass through is an amount that is 

allocable to the qualified production 

activities income (QPAI) generated from 

qualified payments distributed to the 

eligible taxpayer and identified by such 

cooperative in a written notice mailed to 

such taxpayer during the payment 

period described in section 1382(d). 

Without the notice required in 

§ 1.199A–8(d)(3) the eligible taxpayer 

would not know that the Specified 

Cooperative is passing a portion of its 

section 199A(g) deduction to the eligible 

taxpayer. 

The collections of information in 

§ 1.199A–7(h)(3) are necessitated by a 

special transition rule in section 101 of 

the 2018 Act. Under this transition rule, 

the repeal of former section 199 for 

taxable years beginning after December 

31, 2017, does not apply to a qualified 

payment received by a patron from a 

Specified Cooperative in a taxable year 

beginning after December 31, 2017, to 

the extent such qualified payment is 

attributable to QPAI with respect to 

which a deduction is allowable to the 

Specified Cooperative under former 

section 199 for a taxable year of the 

Specified Cooperative beginning before 

January 1, 2018. Such qualified payment 

remains subject to former section 199 

and no deduction is allowed under 

section 199A(a) or (g) with respect to 

such qualified payment. Without these 

collections of information by the 

Specified Cooperative, the patron has no 

way of knowing that the patron is barred 

by the transition rule from using a 

qualified payment received that is QBI 

for the patron’s trade or business to 

claim a section 199A(a) deduction for 

the patron’s trade or business. 

The collections of information in 

§ 1.199A–7(c)(3), (d)(3), (f)(3), and (h)(3) 

as well as § 1.199A–8(d)(3) are satisfied 

by providing information about 

qualified items of income, SSTB 

determinations, qualified payments, the 

section 199A(g) deduction, and the use 

of qualified payments tied to the former 

section 199 deduction, as applicable, on 

an attachment to or on the Form 1099– 

PATR (or any successor form) issued by 

the Cooperative to the patron, unless 

otherwise provided by the instructions 

to the Form. 

For purposes of the Paperwork 

Reduction Act of 1995, (44 U.S.C. 

3507(d)) (PRA), the reporting burden 

associated with proposed § 1.199A– 

7(c)(3), (d)(3), (f)(3), and (h)(3) as well as 

proposed § 1.199A–8(d)(3) will be 

reflected in the PRA Submission 

associated with Form 1099–PATR (OMB 

control number 1545–0118). As further 

discussed in this section, the estimated 

number of respondents for the reporting 

burden associated with these 

information collections is 9,200 based 

on 2018 tax filings. 

B. Collections of Information Conducted 

Through Schedule K–1, Form 1065 

The collection of information in 

§ 1.199A–8(f) is required by section 

199A(g)(5)(B). This section allows a 

Specified Cooperative that is a partner 

in a partnership to use its allocable 

share of gross receipts and related 

deductions, W–2 wages, and cost of 

goods sold to calculate its section 

199A(g) deduction. Under these 


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5566 Federal Register / Vol. 86, No. 11 / Tuesday, January 19, 2021 / Rules and Regulations 

regulations, the partnership must 

separately identify and report the 

allocable share of gross receipts and 

related deductions, W–2 wages, and cost 

of goods sold on or attached to the 

Schedule K–1 to the Form 1065 (or any 

successor form) issued to a Specified 

Cooperative partner, unless otherwise 

provided by the instructions to the 

Form. Without this reporting, the 

Specified Cooperative partner would 

not have the information necessary to 

calculate its section 199A(g) deduction 

from its activities with the partnership. 

The Schedule K–1 to the Form 1065 

will be modified to include a 

mechanism to report the Specified 

Cooperative partner’s allocable share of 

gross receipts and related deductions. 

The collection of information in 

§ 1.199A–8(f) is satisfied when the 

partnership provides the required 

information to its Specified Cooperative 

partners on or attached to the Schedule 

K–1 of Form 1065 (or any successor 

form), unless otherwise provided by the 

instructions to the Form. For purposes 

of the PRA, the reporting burden 

associated with proposed § 1.199A–8(f) 

will be reflected in the PRA Submission 

associated with Form 1065 (OMB 

control number 1545–0123). As 

provided in this section, the estimated 

number of respondents for the reporting 

burden associated with these 

information collections is 750 based on 

2018 tax filings. 

C. Revised Tax Forms 

The revised tax forms are as follows: 

OMB No. New Revision of 

existing form 

Number of 

respondents 

Form 1099–PATR ............................................................................................ 1545–0118 ........................ ✓ 9,200 

Schedule K–1 (Form 1065) ............................................................................. 1545–0123 ........................ ✓ 750 

The current status of the PRA 

submissions related to the tax forms that 

will be revised as a result of the 

information collections in the final 

regulations is provided in the 

accompanying table. As described 

previously, the burdens associated with 

§ 1.199A–7(c)(3), (d)(3), (f)(3), and (h)(3) 

as well as § 1.199A–8(d)(3) will be 

included in the aggregated burden 

estimates for OMB control number 

1545–0118, which represents a new 

total estimated burden time of 564,200 

hours and total estimated monetized 

costs of $49.497 million ($2018). The 

burdens associated with the information 

collection in § 1.199A–8(f) will be 

included in the aggregated burden 

estimates for OMB control number 

1545–0123, which represents a total 

estimated burden time for all forms and 

schedules of 3.344 billion hours and 

total estimated monetized costs of 

$61.558 billion ($2018). The overall 

burden estimates provided for 1545– 

0118 and 1545–0123 are aggregate 

amounts that relate to all information 

collections associated with the 

applicable OMB control number. These 

estimates are therefore unrelated to the 

future calculations needed to assess the 

burden imposed by these regulations. 

To guard against over-counting the 

burden imposed, the Treasury 

Department and the IRS urge readers to 

recognize that these burden estimates 

are aggregates for the applicable types of 

filers. With respect to the final 

regulations, the only relevant burden 

estimates are those associated with 

OMB control number 1545–0118. Future 

estimates under OMB control number 

1545–0123 would capture both changes 

made by the 2018 Act and those that 

arise out of discretionary authority 

exercised in the regulations. In addition, 

when available, drafts of IRS forms are 

posted for comment at www.irs.gov/ 

draftforms. 

One comment on the burden related 

to the Form 1099–PATR reporting 

requirements suggested the Proposed 

Regulations may have understated the 

regulatory burden, but provided no 

specific estimates. Without an 

alternative estimate to evaluate, the final 

regulations will rely on the new 

aggregated burden estimates for OMB 

control number 1545–0118. The 

Treasury Department and the IRS 

request comments on all aspects of 

information collection burdens related 

to the final regulations, including 

estimates for how much time it would 

take to comply with the paperwork 

burdens described above for each 

relevant form and ways for the IRS to 

minimize the paperwork burden. 

Form Type of filer OMB No.(s) Status 

Form 1099–PATR .......................... [Business (Legacy Model)] ............ 1545–0118 Approved by OIRA through 6/30/2023. 

Link: https://www.reginfo.gov/public/do/PRAViewICR?ref_nbr=201602-1545-024 

Form 1065, Schedule K–1 ............. Business (NEW Model) .................. 1545–0123 Approved by OIRA through 1/31/2021. 

Link: https://www.federalregister.gov/documents/2018/10/09/2018-21846/proposed-collection-commentrequest-for-forms-1065-1065-b-1066-1120-1120-c-1120-f-1120-h-1120-nd. 

An agency may not conduct or 

sponsor, and a person is not required to 

respond to, a collection of information 

unless it displays a valid control 

number assigned by the Office of 

Management and Budget. 

Books or records relating to a 

collection of information must be 

retained as long as their contents may 

become material in the administration 

of any internal revenue law. Generally, 

tax returns and tax return information 

are confidential, as required by section 

6103. 

III. Regulatory Flexibility Act 

As described in more detail in this 

section, pursuant to the Regulatory 

Flexibility Act (RFA), 5 U.S.C. chapter 

6, the Treasury Department and the IRS 

hereby certify that these regulations will 

not have a significant economic impact 

on a substantial number of small 

entities. In addition to the economic 

impact described, affected taxpayers, 

regardless of size will also need to 

spend time and resources to read and 

understand these regulations. 

A. § 1.199A–7(c)(3) and (d)(3) 

Although § 1.199A–7(c)(3) and (d)(3) 

will have an impact on a substantial 

number of small entities, the economic 

impact will not be significant. The IRS 

creates the Business Master File which 


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contains data from Form 1120–C, U.S. 

Income Tax Return for Cooperative 

Associations. According to the Business 

Master File data, in 2018, the IRS 

received approximately 9,200 Forms 

1120–C from Cooperatives. The small 

business size standards of the U.S. 

Small Business Association (SBA) under 

13 CFR 121.201 matched to the North 

American Industry Classification 

System (NAICS) were used in estimating 

the number of Cooperatives that are 

considered small businesses. 

Approximately 8,200 (90 percent) of the 

9,200 filers of Forms 1120–C were 

estimated to be small businesses. 

Therefore, a substantial number of small 

entities are affected by the requirements 

in § 1.199A–7(c)(3) and (d)(3). 

Section 1.199A–7 provides rules 

similar to those provided in § 1.199A– 

6. In § 1.199A–6, relevant passthrough 

entities (RPEs) are not permitted to take 

the section 199A deduction but are 

required to determine and report the 

information necessary for their direct 

and indirect owners to determine their 

individual section 199A(a) deductions. 

Section 1.199A–6 requires RPEs to 

determine and report on or attach to the 

RPEs’ Schedule K–1s to the Form 1065 

for each trade or business in which the 

RPE was directly engaged four items: (1) 

The amount of QBI, (2) W–2 wages, (3) 

UBIA of qualified property, and (4) 

SSTBs. 

Although Cooperatives are not RPEs, 

Cooperatives make distributions to 

patrons that such patrons are permitted 

to include in calculating their 

individual section 199A(a) deductions. 

Section 1.199A–7(c) and (d) require the 

Cooperatives to determine and report to 

their patrons whether the distributions 

for which the Cooperatives take 

deductions under section 1382(b) and/ 

or (c)(2), as applicable, constitute 

qualified items of income, gain, 

deduction, and loss and whether they 

are from an SSTB in which the 

Cooperative was directly engaged. 

In TD 9847 the Treasury Department 

and the IRS determined that the 

reporting burden in § 1.199A–6 was 

estimated at 30 minutes to 20 hours, 

depending on individual circumstances, 

with an estimated average of 2.5 hours 

for all affected entities, regardless of 

size. The burden on entities with 

business receipts below $10 million was 

expected to be at the lower end of the 

range (30 minutes to 2.5 hours). The 

estimated compliance burden for 

passthrough entities that issue 

Schedules K–1 is $53 per hour. This 

estimate was derived from the Business 

Taxpayer Burden model developed by 

the IRS’s Office of Research, Applied 

Analytics, and Statistics (RAAS), which 

relates time and out-of-pocket costs of 

business tax preparation, derived from 

survey data, to assets and receipts of 

affected taxpayers along with other 

relevant variables. See Tax Compliance 

Burden (John Guyton, et al., July 2018) 

at https://www.irs.gov/pub/irs-soi/ 

d13315.pdf. Thus, the annual aggregate 

burden on businesses with gross 

receipts below $10 million was 

estimated to be between $19.50 and 

$132.50 per business. The Treasury 

Department and the IRS determined in 

TD 9847 that the requirements in 

§ 1.199A–6 imposed no significant 

economic impact on affected entities. 

The reporting requirements under 

§ 1.199A–7(c)(3) and (d)(3) require 

Specified Cooperatives to report only 

two of the four pieces of information 

RPEs are required to report under 

§ 1.199A–6: the amount of qualified 

items of income, gain, deduction, and 

loss and whether the distributions are 

from an SSTB in which the Cooperative 

was directly engaged. In addition, these 

final regulations, in response to 

comments, revise the proposed 

reporting requirements under § 1.199A– 

7(c)(3) and (d)(3) to reduce the Specified 

Cooperative’s burden by requiring the 

Cooperative to report the total net 

amount of qualified items from nonSSTBs and SSTBs in distributions to 

patrons without delineating these 

amounts business by business. 

Furthermore, the burden imposed by 

§ 1.199A–7(c)(3) and (d)(3) only occurs 

when a Cooperative has net income that 

it may distribute to its patrons such that 

the income will qualify for the income 

tax deductions under section 1382(b) 

and/or (c), as applicable. With respect to 

this net income, Cooperatives already 

know the source of their income and 

deductions without which information 

they would not be able to determine the 

correct distributions to their patrons and 

to claim the income tax deduction for 

these distributions under section 

1382(b) and/or (c)(2), as applicable. 

Finally, assuming that the 

approximately 8,200 filers of Forms 

1120–C were estimated to be small 

businesses in 2018 and that each 

business incurred half of the higher 

figure of $132.50 ($66.25) determined 

for the § 1.199A–6 regulations to satisfy 

the reporting requirements under 

§ 1.199A–7(c)(3) and (d)(3), the annual 

burden imposed by the reporting 

requirements would not exceed $66.25 

per business. Accordingly, the Treasury 

Department and the IRS conclude that 

the requirements in § 1.199A–7(c)(3) 

and (d)(3) will not impose a significant 

economic impact on small entities. 

B. § 1.199A–7(h)(3) 

Although § 1.199A–7(h)(3) will have 

an impact on a substantial number of 

small entities, this economic impact 

will not be significant. As previously 

noted, in 2018, approximately 90 

percent of Cooperatives filing Form 

1120–C were estimated to be small 

businesses. Therefore, a substantial 

number of small entities are affected by 

§ 1.199A–7(h)(3). 

Section 1.199A–7(h)(3) requires 

Cooperatives to notify patrons if, 

pursuant to the transition rule in section 

101 of the 2018 Act, the patron is barred 

from using certain qualified payments 

from a Cooperative to claim a section 

199A(a) deduction in a taxable year 

because these qualified payments are 

attributable to QPAI with respect to 

which a deduction is allowable to the 

Cooperative under former section 199 in 

a taxable year beginning before January 

1, 2018. The Cooperative knows which 

patrons are impacted since, in order to 

claim its deduction under former 

section 199, the Cooperative must 

identify which qualified payments to 

use. The Treasury Department and the 

IRS estimate that the annual burden 

imposed by the requirement in 

§ 1.199A–7(h)(3) will be far less than the 

$66.25 per business estimated for the 

requirements in § 1.199A–7(c)(3) and 

(d)(3) discussed above, since the 

Cooperatives know which patrons are 

impacted and the reporting is limited to 

informing these patrons that they cannot 

use such qualified payments to calculate 

their section 199A(a) deduction. 

Further, the requirements under 

§ 1.199A–7(h)(3), in response to a 

comment, have been revised to allow 

more flexibility by allowing the 

reporting to be made using any 

reasonable method. 

In addition, absent notice from the 

Cooperatives, patrons would have no 

way of determining whether they were 

barred from claiming the section 

199A(a) deduction using such qualified 

payments. Finally, Cooperatives are not 

able to claim a deduction under former 

section 199 for taxable years beginning 

after December 31, 2017. Therefore, the 

reporting required by § 1.199A–7(h)(3) 

will be for a short duration and have a 

limited impact on Cooperatives. 

Accordingly, for all these reasons, the 

requirements in § 1.199A–7(h)(3) will 

not impose a significant economic 

impact on small entities. 

C. §§ 1.199A–7(f)(3) and 1.199A–8(d)(3) 

Sections 1.199A–7(f)(3) and 1.199A– 

8(d)(3) will not have a significant 

economic impact on a substantial 

number of small entities. According to 


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the Business Master File filing data from 

the transcribed fields from the Forms 

1120–C for 2018, of the approximately 

9,200 Forms 1120–C filed by 

Cooperatives, approximately 2,000 filers 

identified their Cooperatives as 

involving agriculture or horticulture 

using the NAICS codes. Of the 2,000 

filers of Forms 1120–C identifying as 

Specified Cooperatives, approximately 

1,600 filers (80 percent) would qualify 

as small business under the SBA 

thresholds. However, the requirement 

under § 1.199A–7(f)(3) involving 

reporting of qualified payments should 

not impose a significant burden because 

qualified payments overlap with the 

section 1382 distributions a Cooperative 

uses to calculate the section 199A(g) 

deduction. Further, the notice 

requirement in § 1.199A–8(d)(3), which 

is imposed under section 

199A(g)(2)(A)(ii), follows the same 

procedures that Cooperatives used 

under former section 199 so 

Cooperatives should already have a 

process in place. Accordingly, 

§§ 1.199A–7(f)(3) and 1.199A–8(d)(3) 

will not impose a significant economic 

impact on a substantial number of small 

entities. 

D. § 1.199A–8(f) 

Although § 1.199A–8(f) will have an 

impact on a substantial number of small 

entities, this impact will not be 

economically significant. According to 

the Business Master File filing data from 

the transcribed fields from the Forms 

1065 for 2018, the IRS estimates that 

there were 4,100,000 partnerships 

reporting their partners’ share of 

partnership items on Schedules K–1 

(Form 1065). The IRS also identified 763 

different partnerships that issued a 

Schedule K–1 to 654 different 

Cooperatives in 2018. The IRS does not 

have information as to whether the 654 

Cooperatives all qualified as Specified 

Cooperatives. 

Of the 763 different partnerships, the 

IRS estimated that 215 of the 

partnerships conducted activities in 

2018 that would have required the 

partnerships to file under § 1.199A–8(f). 

The IRS does not have sufficient data to 

determine the type of business activities 

of the remaining partnerships. To be as 

comprehensive and transparent as 

possible in analyzing the potential 

impact of the final regulations, it is 

assumed that all of these partnerships 

would be required to file under 

§ 1.199A–8(f) and would be considered 

small entities. 

Of the 215 partnerships identified as 

having both issued a Schedule K–1 to a 

Cooperative and conducting eligible 

activities in 2018, the IRS determined 

that 158 of these partnerships 

conducted activities for which the SBA 

uses the number of employees to 

determine if an entity is a small entity 

using the NAICS. The IRS determined 

that 95 of these 97 partnerships would 

be small entities, while two would not 

be small entities based on the reported 

number of Forms W–2 filed in 

connection with the Forms 1065 the 

partnerships filed in 2018. 

The SBA uses income to determine if 

an entity is a small entity for the 

reported business activities of the 

remaining 118 partnerships using the 

NAICS. Based upon the reported income 

for 2018, 84 of the remaining 118 

partnerships are small entities, while 34 

partnerships are not small entities. 

Therefore, a substantial number of small 

entities are affected by requirements in 

§ 1.199A–8(f). 

The economic impact of § 1.199A– 

8(f), however, will not be significant 

because the information required to be 

reported is gross receipts and related 

deductions. This information is readily 

available to each partnership and 

already known for the purpose of 

determining Federal income and other 

tax obligations. A commenter also 

requested that the partnerships be 

allowed to report further information, 

and the rules in § 1.199A–8(f) were 

broadened consistent with the request. 

Because the information required to be 

reported is already available and 

familiar to each partnership, the 

reporting required by § 1.199A–8(f) will 

not impose a significant economic 

impact on small entities. 

Accordingly, the Treasury Department 

and the IRS hereby certify that these 

regulations will not have a significant 

economic impact on a substantial 

number of small entities. 

Pursuant to section 7805(f) of the 

Code, the Proposed Regulation 

preceding this regulation was submitted 

to the Chief Counsel for Advocacy of the 

Small Business Administration for 

comment on its impact on small 

business and no comments were 

received. 

IV. Unfunded Mandates Reform Act 

Section 202 of the Unfunded 

Mandates Reform Act of 1995 (UMRA) 

requires that agencies assess anticipated 

costs and benefits and take certain other 

actions before issuing a final rule that 

includes any Federal mandate that may 

result in expenditures in any one year 

by a state, local, or tribal government, in 

the aggregate, or by the private sector, of 

$100 million in 1995 dollars, updated 

annually for inflation. In 2019, that 

threshold is approximately $154 

million. This rule does not include any 

Federal mandate that may result in 

expenditures by state, local, or tribal 

governments, or by the private sector in 

excess of that threshold. 

V. Executive Order 13132: Federalism 

Executive Order 13132 (titled 

Federalism) prohibits an agency from 

publishing any rule that has federalism 

implications if the rule either imposes 

substantial, direct compliance costs on 

state and local governments, and is not 

required by statute, or preempts state 

law, unless the agency meets the 

consultation and funding requirements 

of section 6 of the Executive Order. 

These rules do not have federalism 

implications, and do not impose 

substantial direct compliance costs on 

state and local governments or preempt 

state law, within the meaning of the 

Executive Order. 

VI. Congressional Review Act 

Pursuant to the Congressional Review 

Act (5 U.S.C. 801 et seq.), the Office of 

lnformation and Regulatory Affairs 

designated this rule as not a ‘major rule’, 

as defined by 5 U.S.C. 804(2). 

Statement of Availability of IRS 

Documents 

IRS Revenue Procedures, Revenue 

Rulings, Notices and other guidance 

cited in this document are published in 

the Internal Revenue Bulletin and are 

available from the Superintendent of 

Documents, U.S. Government 

Publishing Office, Washington, DC 

20402, or by visiting the IRS website at 

http://www.irs.gov. 

Drafting Information 

The principal author of these 

regulations is Jason Deirmenjian, Office 

of Associate Chief Counsel 

(Passthroughs and Special Industries). 

Other personnel from the Treasury 

Department and the IRS participated in 

their development. 

List of Subjects in 26 CFR Part 1 

Income taxes, Reporting and 

recordkeeping requirements. 

Amendments to the Regulations 

Accordingly, 26 CFR parts 1 is 

amended as follows: 

PART 1—INCOME TAXES 

■ Paragraph 1. The authority citation 

for part 1 is amended by: 

■ 1. Removing the entries for §§ 1.199– 

0 through 1.199–9. 

■ 2. Adding entries in numerical order 

to read in part as follows: 

Authority: 26 U.S.C. 7805. 

* * * * * 


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Section 1.199A–7 also issued under 26 

U.S.C. 199A(f)(4) and (g)(6). 

Section 1.199A–8 also issued under 26 

U.S.C. 199A(g)(6). 

Section 1.199A–9 also issued under 26 

U.S.C. 199A(g)(6). 

Section 1.199A–10 also issued under 26 

U.S.C. 199A(g)(6). 

Section 1.199A–11 also issued under 26 

U.S.C. 199A(g)(6). 

Section 1.199A–12 also issued under 26 

U.S.C. 199A(g)(6). 

* * * * * 

§ § 1.199–0 through 1.199–9 [Removed] 

■ Par. 2. Sections 1.199–0 through 

1.199–9 are removed. 

■ Par. 3. Sections 1.199A–7 through 

1.199A–12 are added to read as follows: 

* * * * * 

§ 1.199A–7 Section 199A(a) Rules for 

Cooperatives and their Patrons. 

(a) Overview—(1) In general. This 

section provides guidance and special 

rules on the application of the rules of 

§§ 1.199A–1 through 1.199A–6 

regarding the deduction for qualified 

business income (QBI) under section 

199A(a) (section 199A(a) deduction) of 

the Internal Revenue Code (Code) by 

patrons (patrons) of cooperatives to 

which Part I of subchapter T of chapter 

1 of the Code (subchapter T) applies 

(Cooperatives). Unless otherwise 

provided in this section, all the rules in 

§§ 1.199A–1 through 1.199A–6 relating 

to calculating the section 199A(a) 

deduction apply to patrons and 

Cooperatives. Paragraph (b) of this 

section provides special rules for 

patrons relating to trades or businesses. 

Paragraph (c) of this section provides 

special rules for patrons and 

Cooperatives relating to the definition of 

QBI. Paragraph (d) of this section 

provides special rules for patrons and 

Cooperatives relating to specified 

service trades or businesses (SSTBs). 

Paragraph (e) of this section provides 

special rules for patrons relating to the 

statutory limitations based on W–2 

wages and unadjusted basis 

immediately after acquisition (UBIA) of 

qualified property. Paragraph (f) of this 

section provides special rules for 

specified agricultural or horticultural 

cooperatives (Specified Cooperatives) 

and paragraph (g) of this section 

provides examples for Specified 

Cooperatives and their patrons. 

Paragraph (h) of this section sets forth 

the applicability date of this section and 

a special transition rule relating to 

Specified Cooperatives and their 

patrons. 

(2) At patron level. The section 

199A(a) deduction is applied at the 

patron level, and patrons who are 

individuals (as defined in § 1.199A– 

1(a)(2)) may take the section 199A(a) 

deduction. 

(3) Definitions. For purposes of 

section 199A and § 1.199A–7, the 

following definitions apply— 

(i) Individual is defined in § 1.199A– 

1(a)(2). 

(ii) Patron is defined in § 1.1388–1(e). 

(iii) Patronage and nonpatronage is 

defined in § 1.1388–1(f). 

(iv) Relevant Passthrough Entity (RPE) 

is defined in § 1.199A–1(a)(9). 

(v) Qualified payment is defined in 

§ 1.199A–8(d)(2)(ii). 

(vi) Specified Cooperative is defined 

in § 1.199A–8(a)(2) and is a subset of 

Cooperatives defined in § 1.199A– 

7(a)(1). 

(b) Trade or business. A patron 

(whether the patron is an RPE or an 

individual), and not a Cooperative, must 

determine whether it has one or more 

trades or businesses that it directly 

conducts as defined in § 1.199A– 

1(b)(14). To the extent a patron 

operating a trade or business has income 

directly from that business, the patron 

must follow the rules of §§ 1.199A–1 

through 1.199A–6 to calculate the 

section 199A(a) deduction. Patronage 

dividends or similar payments are 

considered to be generated from the 

trade or business the Cooperative 

conducts on behalf of or with the 

patron. A Cooperative that distributes 

patronage dividends or similar 

payments, as described in paragraph 

(c)(1) of this section, must determine 

and report information to its patrons 

relating to qualified items of income, 

gain, deduction, and loss in accordance 

with paragraphs (c)(3) and (d)(3) of this 

section. A patron that receives 

patronage dividends or similar 

payments, as described in paragraph 

(c)(1) of this section, from a Cooperative 

must follow the rules of paragraphs (c) 

through (e) of this section to calculate 

the section 199A(a) deduction. 

(c) Qualified Business Income—(1) In 

general. QBI means the net amount of 

qualified items of income, gain, 

deduction, and loss with respect to any 

trade or business as determined under 

the rules of § 199A(c)(3) and § 1.199A– 

3(b). A qualified item of income 

includes distributions for which the 

Cooperative is allowed a deduction 

under section 1382(b) and (c)(2) 

(including patronage dividends or 

similar payments, such as money, 

property, qualified written notices of 

allocations, and qualified per-unit retain 

certificates, as well as money or 

property paid in redemption of a 

nonqualified written notice of allocation 

(collectively patronage dividends or 

similar payments)), provided such 

distribution is otherwise a qualified 

item of income, gain, deduction, or loss. 

See special rule in paragraph (d)(3) of 

this section relating to SSTBs that may 

affect QBI. 

(2) QBI determinations made by 

patron. A patron must determine QBI 

for each trade or business it directly 

conducts. In situations where the patron 

receives distributions described in 

paragraph (c)(1) of this section, the 

Cooperative must determine whether 

those distributions include qualified 

items of income, gain, deduction, and 

loss as determined under rules of 

§ 199A(c)(3) and § 1.199A–3(b). These 

distributions may be included in the 

QBI of the patron’s trade or business to 

the extent that: 

(i) The distributions are related to the 

patron’s trade or business as defined in 

§ 1.199A–1(b)(14); 

(ii) The distributions are qualified 

items of income, gain, deduction, and 

loss as determined under rules of 

§ 199A(c)(3) and § 1.199A–3(b) at the 

Cooperative’s trade or business level; 

(iii) The distributions are not items 

from an SSTB as defined in § 199A(d)(2) 

at the Cooperative’s trade or business 

level (except as permitted by the 

threshold rules in § 199A(d)(3) and 

§ 1.199A–5(a)(2)); and 

(iv) Certain information is reported by 

the Cooperative about these payments as 

provided in paragraphs (c)(3) and (d)(3) 

of this section. 

(3) Qualified items of income, gain, 

deduction, and loss determinations 

made and reported by Cooperatives. In 

the case of a Cooperative that makes 

distributions described in paragraph 

(c)(1) of this section to a patron, the 

Cooperative must determine the amount 

of qualified items of income, gain, 

deduction, and loss as determined 

under the rules of § 199A(c)(3) and 

§ 1.199A–3(b) in those distributions. A 

patron must determine whether these 

qualified items relate to one or more 

trades or businesses that it directly 

conducts as defined in § 1.199A– 

1(b)(14). Pursuant to this paragraph 

(c)(3), the Cooperative must report the 

net amount of qualified items with 

respect to non-SSTBs of the Cooperative 

in the distributions made to the patron 

on an attachment to or on the Form 

1099–PATR, Taxable Distributions 

Received From Cooperatives, (or any 

successor form) issued by the 

Cooperative to the patron, unless 

otherwise provided by the instructions 

to the Form. If the Cooperative does not 

report on or before the due date of the 

Form 1099–PATR the amount of such 

qualified items of income, gain, 

deduction, and loss in the distributions 

to the patron, the amount of 

distributions from the Cooperative that 


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may be included in the patron’s QBI is 

presumed to be zero. See special rule in 

paragraph (d)(3) of this section relating 

to reporting of qualified items of 

income, gain, deduction, and loss with 

respect to SSTBs of the Cooperative. 

(d) Specified Service Trades or 

Businesses—(1) In general. This section 

provides guidance on the determination 

of SSTBs as defined in § 199A(d)(2) and 

§ 1.199A–5. Unless otherwise provided 

in this section, all of the rules in 

§ 1.199A–5 relating to SSTBs apply to 

patrons of Cooperatives. 

(2) SSTB determinations made by 

patron. A patron (whether an RPE or an 

individual) must determine whether 

each trade or business it directly 

conducts is an SSTB. 

(3) SSTB determinations made and 

reported by Cooperatives—(i) In general. 

In the case of a Cooperative that makes 

distributions described in paragraph 

(c)(1) of this section to a patron, the 

Cooperative must determine the amount 

of qualified items of income, gain, 

deduction, and loss as determined 

under the rules of § 199A(c)(3) and 

§ 1.199A–3(b) with respect to SSTBs 

directly conducted by the Cooperative. 

A patron must determine whether these 

qualified items relate to one or more 

trades or businesses that it directly 

conducts as defined in § 1.199A– 

1(b)(14). The Cooperative must report 

the net amount of qualified items with 

respect to the SSTBs of the Cooperative 

in the distributions made to the patron 

on an attachment to or on the Form 

1099–PATR, Taxable Distributions 

Received from Cooperatives, (or any 

successor form) issued by the 

Cooperative to the patron, unless 

otherwise provided by the instructions 

to the Form. If the Cooperative does not 

report the amount on or before the due 

date of the Form 1099–PATR, then only 

the amount that a Cooperative reports as 

qualified items of income, gain, 

deduction, and loss under § 1.199A– 

7(c)(3) may be included in the patron’s 

QBI, and the remaining amount of 

distributions from the Cooperative that 

may be included in the patron’s QBI is 

presumed to be zero. 

(ii) Patron allocation of expenses paid 

to Cooperative for SSTB items of income 

reported by Cooperative—(A) In general. 

When a Cooperative reports SSTB items 

to a patron, a patron may allocate a 

deductible expense that was paid to the 

Cooperative in connection with the 

patron’s qualified trade or business 

between a patron’s qualified trade or 

business income and the SSTB income 

reported to it by the Cooperative only if 

the SSTB income directly relates to the 

deductible expense. A patron can 

allocate the deductible expense paid by 

the patron to the Cooperative only up to 

the amount of SSTB income reported by 

the Cooperative. 

(B) Example. Patron allocating 

expenses between qualified trade or 

business and SSTB income from a 

Cooperative. (1) Cooperative provides to 

its patrons a service that is an SSTB 

under section 199A(d)(2). P, a patron, 

runs a qualified trade or business under 

section 199A(d)(1) and incurs expenses 

for the service from the Cooperative in 

P’s qualified trade or business. P pays 

the Cooperative $1,000 for the service. 

Cooperative later pays P a patronage 

dividend of $50 related to the service. 

(i2) Cooperative reports the $50 as 

SSTB income on the Form 1099–PATR 

issued to P. 

(3) Since P’s deductible expense for 

services from the Cooperative was in 

connection with a qualified trade or 

business and the SSTB income directly 

relates to that expense, P may allocate 

the expense under paragraph (d)(3)(ii) of 

this section. Accordingly, $50 of the 

$1,000 expense is allocated to P’s SSTB 

income, and $950 of the expense is 

allocated to P’s qualified trade or 

business and is included in P’s QBI 

calculation. 

(e) W–2 wages and unadjusted basis 

immediately after acquisition of 

qualified property—(1) In general. This 

section provides guidance on 

calculating a trade or business’s W–2 

wages and the UBIA of qualified 

property properly allocable to QBI. 

(2) Determinations made by patron. 

The determination of W–2 wages and 

UBIA of qualified property must be 

made for each trade or business by the 

patron (whether an RPE or individual) 

that directly conducts the trade or 

business before applying the aggregation 

rules of § 1.199A–4. Unlike RPEs, 

Cooperatives do not compute and 

allocate their W–2 wages and UBIA of 

qualified property to patrons. 

(f) Special rules for patrons of 

Specified Cooperatives—(1) Section 

199A(b)(7) reduction. A patron of a 

Specified Cooperative that receives a 

qualified payment must reduce its 

section 199A(a) deduction as provided 

in § 1.199A–1(e)(7). This reduction 

applies whether the Specified 

Cooperative passes through all, some, or 

none of the Specified Cooperative’s 

section 199A(g) deduction to the patron 

in that taxable year. The rules relating 

to the section 199A(g) deduction can be 

found in §§ 1.199A–8 through 1.199A– 

12. 

(2) Reduction calculation—(i) 

Allocation method. If in any taxable 

year, a patron receives income or gain 

related to qualified payments and 

income or gain that is not related to 

qualified payments in a trade or 

business, the patron must allocate the 

income or gain and related deductions, 

losses and W–2 wages using a 

reasonable method based on all the facts 

and circumstances for purposes of 

calculating the reduction in § 1.199A– 

1(e)(7). Different reasonable methods 

may be used for different items and 

related deductions of income, gain, 

deduction, and loss. The chosen 

reasonable method for each item must 

be consistently applied from one taxable 

year of the patron to another, and must 

clearly reflect the income and expenses 

of each trade or business. The overall 

combination of methods must also be 

reasonable based on all the facts and 

circumstances. The books and records 

maintained for a trade or business must 

be consistent with any allocations under 

this paragraph (f)(2)(i). 

(ii) Safe harbor. A patron with taxable 

income under the threshold amount set 

forth in section 199A(e)(2) is eligible to 

use the safe harbor set forth in this 

paragraph (f)(2)(ii) to apportion its 

deductions, losses and W–2 wages 

instead of the allocation method set 

forth in paragraph (f)(2)(i) of this section 

for any taxable year in which the patron 

receives income or gain related to 

qualified payments and income or gain 

not related to qualified payments in a 

trade or business. Under the safe harbor 

the patron may apportion its 

deductions, losses and W–2 wages 

ratably between income or gain related 

to qualified payments and income or 

gain that is not related to qualified 

payments for purposes of calculating the 

reduction in paragraph (f)(1) of this 

section. Accordingly, the amount of 

deductions and losses apportioned to 

determine QBI allocable to qualified 

payments is equal to the proportion of 

the total deductions and losses that the 

amount of income or gain related to 

qualified payments bears to total income 

or gain used to determine QBI. The 

same proportion applies to determine 

the amount of W–2 wages allocable to 

the portion of the trade or business that 

received qualified payments. 

(3) Qualified payments notice 

requirement. A Specified Cooperative 

must report the amount of the qualified 

payments made to the eligible taxpayer, 

as defined in section 199A(g)(2)(D), on 

an attachment to or on the Form 1099– 

PATR (or any successor form) issued by 

the Cooperative to the patron, unless 

otherwise provided by the instructions 

to the Form. 

(g) Examples. The following examples 

illustrate the provisions of paragraph (f) 

of this section. For purposes of these 

examples, assume that the Specified 

Cooperative has satisfied the applicable 


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written notice requirements in 

paragraphs (c)(3), (d)(3) and (f)(3) of this 

section. 

(1) Example 1. Patron of Specified 

Cooperative with W–2 wages. (i) P, a 

grain farmer and patron of nonexempt 

Specified Cooperative C, delivered to C 

during 2020 2% of all grain marketed 

through C during such year. During 

2021, P receives $20,000 in patronage 

dividends and $1,000 of allocated 

section 199A(g) deduction from C 

related to the grain delivered to C 

during 2020. 

(ii) P has taxable income of $75,000 

for 2021 (determined without regard to 

section 199A) and has a filing status of 

married filing jointly. P’s QBI related to 

its grain trade or business for 2021 is 

$50,000, which consists of gross receipts 

of $150,000 from sales to an 

independent grain elevator, per-unit 

retain allocations received from C 

during 2021 of $80,000, patronage 

dividends received from C during 2021 

related to C’s 2020 net earnings of 

$20,000, and expenses of $200,000 

(including $50,000 of W–2 wages). 

(iii) The portion of QBI from P’s grain 

trade or business related to qualified 

payments received from C during 2021 

is $10,000, which consists of per-unit 

retain allocations received from C 

during 2021 of $80,000, patronage 

dividends received from C during 2021 

related to C’s 2020 net earnings of 

$20,000, and properly allocable 

expenses of $90,000 (including $25,000 

of W–2 wages). 

(iv) P’s deductible amount related to 

the grain trade or business is 20% of 

QBI ($10,000) reduced by the lesser of 

9% of QBI related to qualified payments 

received from C ($900) or 50% of W–2 

wages related to qualified payments 

received from C ($12,500), or $9,100. As 

P does not have any other trades or 

businesses, the combined QBI amount is 

also $9,100. 

(v) P’s deduction under section 199A 

for 2021 is $10,100, which consists of 

the combined QBI amount of $9,100, 

plus P’s deduction passed through from 

C of $1,000. 

(2) Example 2. Patron of Specified 

Cooperative without W–2 wages. (i) C 

and P have the same facts for 2020 and 

2021 as Example 1, except that P has 

expenses of $200,000 that include zero 

W–2 wages during 2021. 

(ii) P’s deductible amount related to 

the grain trade or business is 20% of 

QBI ($10,000) reduced by the lesser of 

9% of QBI related to qualified payments 

received from C ($900) or 50% of W–2 

wages related to qualified payments 

received from C ($0), or $10,000. 

(iii) P’s deduction under section 199A 

for 2021 is $11,000, which consists of 

the combined QBI amount of $10,000, 

plus P’s deduction passed through from 

C of $1,000. 

(3) Example 3. Patron of Specified 

Cooperative—Qualified Payments do 

not equal QBI and no section 199A(g) 

passthrough. (i) P, a grain farmer and a 

patron of a nonexempt Specified 

Cooperative C, during 2020, receives 

$60,000 in patronage dividends, 

$100,000 in per-unit retain allocations, 

and $0 of allocated section 199A(g) 

deduction from C related to the grain 

delivered to C. C notifies P that only 

$150,000 of the patronage dividends 

and per-unit retain allocations are 

qualified payments because $10,000 of 

the payments are not attributable to C’s 

QPAI. 

(ii) P has taxable income of $90,000 

(determined without regard to section 

199A) and has a filing status of married 

filing jointly. P’s QBI related to its grain 

trade or business is $45,000, which 

consists of gross receipts of $95,000 

from sales to an independent grain 

elevator, plus $160,000 from C (all 

payments from C qualify as qualified 

items of income, gain, deduction, and 

loss), less expenses of $210,000 

(including $30,000 of W–2 wages). 

(iii) The portion of QBI from P’s grain 

trade or business related to qualified 

payments received from C is $25,000, 

which consists of the qualified 

payments received from C of $150,000, 

less the properly allocable expenses of 

$125,000 (including $18,000 of W–2 

wages), which were determined using a 

reasonable method under paragraph 

(f)(2)(ii) of this section. 

(iv) P’s patron reduction is $2,250, 

which is the lesser of 9% of QBI related 

to qualified payments received from C, 

$2,250 (9% × $25,000), or 50% of W– 

2 wages related to qualified payments 

received from C, $9,000 (50% × 

$18,000). As P does not have any other 

trades or businesses, the combined QBI 

amount is $6,750 (20% of P’s total QBI, 

$9,000 (20% × $45,000), reduced by the 

patron reduction of $2,250). 

(v) P’s deduction under section 199A 

is $6,750, which consists of the 

combined QBI amount of $6,750. 

(4) Example 4. Patron of Specified 

Cooperative—Reasonable Method under 

paragraph (f)(2)(i) of this section. P is a 

grain farmer that has $45,000 of QBI 

related to P’s grain trade or business in 

2020. P’s QBI consists of $105,000 of 

sales to an independent grain elevator, 

$100,000 of per-unit retain allocations, 

and $50,000 of patronage dividends 

from a nonexempt Specified 

Cooperative C, for which C reports 

$150,000 of qualified payments to P as 

required by paragraph (f)(3) of this 

section. P’s grain trade or business has 

$210,000 of expenses (including 

$30,000 of W–2 wages). P delivered 65x 

bushels of grain to C and sold 35x 

bushels of comparable grain to the 

independent grain elevator. To allocate 

the expenses between qualified 

payments ($150,000) and other income 

($105,000), P compares the bushels of 

grain delivered to C (65x) to the total 

bushels of grain delivered to C and sold 

to the independent grain elevator 

(100x). P determines $136,500 (65% × 

$210,000) of expenses (including 

$19,500 of W–2 wages) are properly 

allocable to the qualified payments. The 

portion of QBI from P’s grain trade or 

business related to qualified payments 

received from C is $13,500, which 

consists of qualified payments of 

$150,000 less the properly allocable 

expenses of $136,500 (including 

$19,500 of W–2 wages). P’s method of 

allocating expenses is a reasonable 

method under paragraph (f)(2)(i) of this 

section. 

(5) Example 5. Patron of Specified 

Cooperative using safe harbor to 

allocate. (i) P is a grain farmer with 

taxable income of $100,000 for 2021 

(determined without regard to section 

199A) and has a filing status of married 

filing jointly. P’s QBI related to P’s grain 

trade or business for 2021 is $50,000, 

which consists of gross receipts of 

$180,000 from sales to an independent 

grain elevator, per-unit retain 

allocations received from a Specified 

Cooperative C during 2021 of $15,000, 

patronage dividends received from C 

during 2021 related to C’s 2020 net 

earnings of $5,000, and expenses of 

$150,000 (including $50,000 of W–2 

wages). C also passed through $1,800 of 

the section 199A(g) deduction to P, 

which related to the grain delivered by 

P to the Specified Cooperative during 

2020. P uses the safe harbor in 

paragraph (f)(2)(ii) of this section to 

determine the expenses (including W–2 

wages) allocable to the qualified 

payments. 

(ii) Using the safe harbor to allocate 

P’s $150,000 of expenses, P allocates 

$15,000 of the expenses to the qualified 

payments ($150,000 of expenses 

multiplied by the ratio (0.10) of 

qualified payments ($20,000) to total 

gross receipts ($200,000)). Using the 

same ratio, P also determines there are 

$5,000 of W–2 wages allocable ($50,000 

multiplied by 0.10) to the qualified 

payments. 

(iii) The portion of QBI from P’s grain 

trade or business related to qualified 

payments received from C during 2021 

is $5,000, which consists of per-unit 

retain allocations received from C 

during 2021 of $15,000, patronage 

dividends of $5,000, and properly 


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allocable expenses of $15,000 (including 

$5,000 of W–2 wages). 

(iv) P’s QBI related to the grain trade 

or business is 20% of QBI ($10,000) 

reduced by the lesser of 9% of QBI 

related to qualified payments received 

from C ($450) or 50% of W–2 wages 

related to qualified payments received 

from C ($2,500), or $9,550. As P does 

not have any other trades or businesses, 

the combined QBI amount is also 

$9,550. 

(v) P’s deduction under section 199A 

for 2021 is $11,350, which consists of 

the combined QBI amount of $9,550, 

plus P’s deduction passed through from 

C of $1,800. 

(h) Applicability date—(1) General 

rule. Except as provided in paragraph 

(h)(2) of this section, the provisions of 

this section apply to taxable years 

beginning after January 19, 2021. 

Taxpayers, however, may choose to 

apply the rules of §§ 1.199A–7 through 

1.199A–12 for taxable years beginning 

on or before that date, provided 

taxpayers apply the rules in their 

entirety and in a consistent manner. 

(2) Transition rule for qualified 

payments of patrons of Cooperatives. 

See the transition rule for qualified 

payments of patrons of Cooperatives for 

a taxable year of a Cooperative 

beginning before January 1, 2018 in the 

Consolidated Appropriations Act, 2018 

(Pub. L. 115–141, 132 Stat. 348) 

Division T, section 101(c). 

(3) Notice from the Cooperative. If a 

patron of a Cooperative cannot claim a 

deduction under section 199A for any 

qualified payments described in the 

transition rule set forth in paragraph 

(h)(2) of this section, the Cooperative 

must use a reasonable method to 

identify the qualified payments to its 

patrons. A reasonable method includes 

reporting this information on an 

attachment to or on the Form 1099– 

PATR (or any successor form) issued by 

the Cooperative to the patron, unless 

otherwise provided by the instructions 

to the Form. 

§ 1.199A–8 Deduction for income 

attributable to domestic production 

activities of specified agricultural or 

horticultural cooperatives 

(a) Overview—(1) In general. This 

section provides rules relating to the 

deduction for income attributable to 

domestic production activities of a 

specified agricultural or horticultural 

cooperative (Specified Cooperative). 

This paragraph (a) provides an overview 

and definitions of certain terms. 

Paragraph (b) of this section provides 

rules explaining the steps a nonexempt 

Specified Cooperative performs to 

calculate its section 199A(g) deduction 

and includes definitions of relevant 

terms. Paragraph (c) of this section 

provides rules explaining the steps an 

exempt Specified Cooperative performs 

to calculate its section 199A(g) 

deduction. Paragraph (d) of this section 

provides rules for Specified 

Cooperatives passing through the 

section 199A(g) deduction to patrons. 

Paragraph (e) of this section provides 

examples that illustrate the provisions 

of paragraphs (b), (c), and (d) of this 

section. Paragraph (f) of this section 

provides guidance for Specified 

Cooperatives that are partners in a 

partnership. Paragraph (g) of this section 

provides guidance on the recapture of a 

claimed section 199A(g) deduction. 

Paragraph (h) of this section provides 

effective dates. For additional rules 

addressing an expanded affiliated group 

(EAG), to which the principles of this 

section apply, see § 1.199A–12. The 

provisions of this section apply solely 

for purposes of section 199A of the 

Internal Revenue Code (Code). 

(2) Specified Cooperative—(i) In 

general. Specified Cooperative means a 

cooperative to which Part I of 

subchapter T of chapter 1 of the Code 

applies and which— 

(A) Manufactures, produces, grows, or 

extracts (MPGE) in whole or significant 

part within the United States any 

agricultural or horticultural product, or 

(B) Is engaged in the marketing of 

agricultural or horticultural products 

that have been MPGE in whole or 

significant part within the United States 

by the patrons of the cooperative. 

(C) See § 1.199A–9 for rules to 

determine if a Specified Cooperative has 

MPGE an agricultural or horticultural 

product in whole or significant part 

within the United States. 

(ii) Types of Specified Cooperatives. A 

Specified Cooperative that is qualified 

as a farmer’s cooperative organization 

under section 521 is an exempt 

Specified Cooperative, while a Specified 

Cooperative not so qualified is a 

nonexempt Specified Cooperative. 

(3) Patron is defined in § 1.1388–1(e). 

(4) Agricultural or horticultural 

products are agricultural, horticultural, 

viticultural, and dairy products, 

livestock and the products thereof, the 

products of poultry and bee raising, the 

edible products of forestry, and any and 

all products raised or produced on 

farms and processed or manufactured 

products thereof within the meaning of 

the Cooperative Marketing Act of 1926, 

44 Stat. 802 (1926). Agricultural or 

horticultural products also include 

aquatic products that are farmed. Some 

examples of agricultural or horticultural 

products include, but are not limited to, 

fruits, grains, oilseeds, rice, vegetables, 

legumes, grasses (including hay), plants 

of all kinds, flowers (including hops), 

seeds, tobacco, cotton, sugar cane and 

sugar beets. Some examples of livestock 

products include, but are not limited to, 

wool, fur, hides, eggs, down, honey, and 

silk. Some examples of edible forestry 

products include, but are not limited to, 

fruits, nuts, berries and mushrooms. 

Some examples of aquatic products 

include, but are not limited to, fish, 

crustaceans, shellfish and seaweed. In 

addition, agricultural or horticultural 

products include fertilizer, diesel fuel, 

and other supplies (for example, seed, 

feed, herbicides, and pesticides) used in 

agricultural or horticultural production 

that are MPGE by a Specified 

Cooperative. Agricultural or 

horticultural products, however, do not 

include intangible property other than 

when incorporated into a tangible 

agricultural or horticultural product 

(other than as provided in the exception 

in § 1.199A–9(b)(2)). Intangible property 

for this purpose includes, for example, 

the rights to MPGE and sell an 

agricultural or horticultural product 

with certain characteristics protected by 

a patent, or the rights to a trademark or 

tradename. This exclusion of intangible 

property does not apply to intangible 

characteristics of any particular 

agricultural or horticultural product. For 

example, gross receipts from the sale of 

different varieties of oranges would be 

considered from the disposition of 

agricultural or horticultural products. 

However, gross receipts from the license 

of the right to produce and sell a certain 

variety of an orange would be 

considered separate from the orange and 

not from an agricultural or horticultural 

product. 

(b) Steps for a nonexempt Specified 

Cooperative in calculating deduction— 

(1) In general. Except as provided in 

paragraph (c)(3) of this section, this 

paragraph (b) applies only to nonexempt 

Specified Cooperatives. 

(2) Step 1—Gross receipts and related 

deductions—(i) Identify. To determine 

the section 199A(g) deduction, a 

Specified Cooperative first identifies its 

patronage and nonpatronage gross 

receipts and related cost of goods sold 

(COGS), deductible expenses, W–2 

wages, etc. (deductions) and allocates 

them between patronage and 

nonpatronage. A single definition for 

the term patronage and nonpatronage is 

found in § 1.1388–1(f). 

(ii) Applicable gross receipts and 

deductions. Except as described in this 

paragraph (b)(ii), for all purposes of the 

section 199A(g) deduction, a Specified 

Cooperative can use only patronage 

gross receipts and related deductions to 

calculate qualified production activities 


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income (QPAI) as defined in paragraph 

(b)(4)(ii) of this section, oil-related QPAI 

as defined in paragraph (b)(7)(ii) of this 

section, the W–2 wage limitation in 

paragraph (b)(5)(ii)(B) of this section, or 

taxable income as defined in paragraph 

(b)(5)(ii)(C) of this section. A Specified 

Cooperative cannot use its nonpatronage 

gross receipts and related deductions to 

calculate its section 199A(g) deduction, 

other than treating all of its 

nonpatronage gross receipts as 

patronage non-DPGR for purposes of 

applying the de minimis rules in 

§ 1.199A–9(c)(3). If a Specified 

Cooperative treats all nonpatronage 

gross receipts as DPGR under § 1.199A– 

9(c)(3)(i), then a Specified Cooperative 

shall also treat its deductions related to 

the nonpatronage gross receipts as 

patronage in calculating QPAI, oilrelated QPAI, the W–2 wage limitation, 

or taxable income for purposes of the 

section 199A(g) deduction. 

(iii) Gross receipts are the Specified 

Cooperative’s receipts for the taxable 

year that are recognized under the 

Specified Cooperative’s methods of 

accounting used for Federal income tax 

purposes for the taxable year. See 

§ 1.199A–12 if the gross receipts are 

recognized in an intercompany 

transaction within the meaning of 

§ 1.1502–13. Gross receipts include total 

sales (net of returns and allowances) 

and all amounts received for services. In 

addition, gross receipts include any 

income from investments and from 

incidental or outside sources. For 

example, gross receipts include interest 

(except interest under section 103 but 

including original issue discount), 

dividends, rents, royalties, and 

annuities, regardless of whether the 

amounts are derived in the ordinary 

course of the Specified Cooperative’s 

trade or business. Gross receipts are not 

reduced by COGS or by the cost of 

property sold if such property is 

described in section 1221(a)(1), (2), (3), 

(4), or (5). Finally, gross receipts do not 

include amounts received by the 

Specified Cooperative with respect to 

sales tax or other similar state or local 

taxes if, under the applicable state or 

local law, the tax is legally imposed on 

the purchaser of the good or service and 

the Specified Cooperative merely 

collects and remits the tax to the taxing 

authority. If, in contrast, the tax is 

imposed on the Specified Cooperative 

under the applicable law, then gross 

receipts include the amounts received 

that are allocable to the payment of such 

tax. 

(3) Step 2—Determine gross receipts 

that are DPGR—(i) In general. A 

Specified Cooperative examines its 

patronage gross receipts to determine 

which of these are DPGR. A Specified 

Cooperative does not use nonpatronage 

gross receipts to determine DPGR. 

(ii) DPGR are the gross receipts of the 

Specified Cooperative that are derived 

from any lease, rental, license, sale, 

exchange, or other disposition of an 

agricultural or horticultural product that 

is MPGE by the Specified Cooperative or 

its patrons in whole or significant part 

within the United States. DPGR does not 

include gross receipts derived from 

services or the lease, rental, license, 

sale, exchange, or other disposition of 

land unless a de minimis or other 

exception applies. See § 1.199A–9 for 

additional rules on determining if gross 

receipts are DPGR. 

(4) Step 3—Determine QPAI—(i) In 

general. A Specified Cooperative 

determines QPAI from patronage DPGR 

and patronage deductions identified in 

paragraphs (b)(3)(ii) and (b)(2)(i) of this 

section, respectively. A Specified 

Cooperative does not use nonpatronage 

gross receipts or deductions to 

determine QPAI. 

(ii) QPAI for the taxable year means 

an amount equal to the excess (if any) 

of— 

(A) DPGR for the taxable year, over 

(B) The sum of— 

(1) COGS that are allocable to DPGR, 

and 

(2) Other expenses, losses, or 

deductions (other than the section 

199A(g) deduction) that are properly 

allocable to DPGR. 

(C) QPAI computational rules. QPAI 

is computed without taking into account 

the section 199A(g) deduction or any 

deduction allowed under section 

1382(b). See § 1.199A–10 for additional 

rules on calculating QPAI. 

(5) Step 4—Calculate deduction—(i) 

In general. From QPAI and taxable 

income, a Specified Cooperative 

calculates its section 199A(g) deduction 

as provided in paragraph (b)(5)(ii) of 

this section. 

(ii) Deduction—(A) In general. A 

Specified Cooperative is allowed a 

deduction equal to 9 percent of the 

lesser of— 

(1) QPAI of the Specified Cooperative 

for the taxable year, or 

(2) Taxable income of the Specified 

Cooperative for the taxable year. 

(B) W–2 wage limitation. The 

deduction allowed under paragraph 

(b)(5)(ii)(A) of this section for any 

taxable year cannot exceed 50 percent of 

the patronage W–2 wages attributable to 

DPGR for the taxable year. See 

§ 1.199A–11 for additional rules on 

calculating the patronage W–2 wage 

limitation. 

(C) Taxable income. Taxable income 

is defined in section 63, and adjusted 

under section 1382 and § 1.1382–1 and 

§ 1.1382–2. For purposes of determining 

the amount of the deduction allowed 

under paragraph (b)(5)(ii) of this section, 

taxable income is limited to taxable 

income and related deductions from 

patronage sources, other than as allowed 

under paragraph (b)(2)(ii) of this section. 

Taxable income is computed without 

taking into account the section 199A(g) 

deduction or any deduction allowable 

under section 1382(b). Patronage net 

operating losses (NOLs) reduce taxable 

income in the amount that the Specified 

Cooperative would use to reduce taxable 

income (no lower than zero) before 

using the section 199A(g) deduction, but 

do not reduce taxable income that is the 

result of not taking into account any 

deduction allowable under section 

1382(b). 

(6) Use of patronage section 199A(g) 

deduction. Except as provided in 

§ 1.199A–12(c)(2) related to the rules for 

EAGs, the patronage section 199A(g) 

deduction cannot create or increase a 

patronage or nonpatronage NOL or the 

amount of a patronage or nonpatronage 

NOL carryover or carryback, if 

applicable, in accordance with section 

172. A patronage section 199A(g) 

deduction can be applied only against 

patronage income and deductions. A 

patronage section 199A(g) deduction 

that is not used in the appropriate 

taxable year is lost. To the extent that a 

Specified Cooperative passes through 

the section 199A(g) deduction to 

patrons and appropriately adjusts the 

section 1382 deduction under § 1.199A– 

8(d), the amount passed through is not 

considered to create or increase a 

patronage or nonpatronage NOL or the 

amount of a patronage or nonpatronage 

NOL carryover or carryback, if 

applicable, in accordance with section 

172. 

(7) Special rules for nonexempt 

Specified Cooperatives that have oilrelated QPAI—(i) Reduction of section 

199A(g) deduction. If a Specified 

Cooperative has oil-related QPAI for any 

taxable year, the amount otherwise 

allowable as a deduction under 

paragraph (b)(5)(ii) of this section must 

be reduced by 3 percent of the least of— 

(A) Oil-related QPAI of the Specified 

Cooperative for the taxable year, 

(B) QPAI of the Specified Cooperative 

for the taxable year, or 

(C) Taxable income of the Specified 

Cooperative for the taxable year. 

(ii) Oil-related QPAI means, for any 

taxable year, the patronage QPAI that is 

attributable to the production, refining, 

processing, transportation, or 

distribution of oil, gas, or any primary 

product thereof (within the meaning of 

section 927(a)(2)(C), as in effect before 


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its repeal) during such taxable year. Oilrelated QPAI for any taxable year is an 

amount equal to the excess (if any) of 

patronage DPGR derived from the 

production, refining or processing of oil, 

gas, or any primary product thereof (oilrelated DPGR) over the sum of— 

(A) COGS of the Specified 

Cooperative that is allocable to such 

receipts; and 

(B) Other expenses, losses, or 

deductions (other than the section 

199A(g) deduction) that are properly 

allocable to such receipts. 

(iii) Special rule for patronage oilrelated DPGR. Oil-related DPGR does 

not include gross receipts derived from 

the transportation or distribution of oil, 

gas, or any primary product thereof. 

However, to the extent that the 

nonexempt Specified Cooperative treats 

gross receipts derived from 

transportation or distribution of oil, gas, 

or any primary product thereof as part 

of DPGR under § 1.199A–9(c)(3)(i), or 

under § 1.199A–9(j)(3)(i)(B), then the 

Specified Cooperative must treat those 

patronage gross receipts as oil-related 

DGPR. 

(iv) Oil includes oil recovered from 

both conventional and nonconventional recovery methods, 

including crude oil, shale oil, and oil 

recovered from tar/oil sands. The 

primary product from oil includes all 

products derived from the destructive 

distillation of oil, including volatile 

products, light oils such as motor fuel 

and kerosene, distillates such as 

naphtha, lubricating oils, greases and 

waxes, and residues such as fuel oil. 

The primary product from gas means all 

gas and associated hydrocarbon 

components from gas wells or oil wells, 

whether recovered at the lease or upon 

further processing, including natural 

gas, condensates, liquefied petroleum 

gases such as ethane, propane, and 

butane, and liquid products such as 

natural gasoline. The primary products 

from oil and gas provided in this 

paragraph (b)(7)(iv) are not intended to 

represent either the only primary 

products from oil or gas, or the only 

processes from which primary products 

may be derived under existing and 

future technologies. Examples of nonprimary products include, but are not 

limited to, petrochemicals, medicinal 

products, insecticides, and alcohols. 

(c) Exempt Specified Cooperatives— 

(1) In general. This paragraph (c) applies 

only to exempt Specified Cooperatives. 

(2) Two section 199A(g) deductions. 

The Specified Cooperative must 

calculate two separate section 199A(g) 

deductions, one patronage sourced and 

the other nonpatronage sourced, unless 

a Specified Cooperative treats all of its 

nonpatronage gross receipts and related 

deductions as patronage as described in 

paragraph (b)(2)(ii) of this section. 

Patronage and nonpatronage gross 

receipts, related COGS that are allocable 

to DPGR, and other expenses, losses, or 

deductions (other than the section 

199A(g) deduction) that are properly 

allocable to DPGR (deductions), DPGR, 

QPAI, NOLs, W–2 wages, etc. are not 

netted to calculate these two separate 

section 199A(g) deductions. 

(3) Exempt Specified Cooperative 

patronage section 199A(g) deduction. 

The Specified Cooperative calculates its 

patronage section 199A(g) deduction 

following steps 1 through 4 in 

paragraphs (b)(2) through (5) of this 

section as if it were a nonexempt 

Specified Cooperative. 

(4) Exempt Specified Cooperative 

nonpatronage section 199A(g) 

deduction—(i) In general. The Specified 

Cooperative calculates its nonpatronage 

section 199A(g) deduction following 

steps 2 through 4 in paragraphs (b)(2) 

through (5) of this section using only 

nonpatronage gross receipts and related 

nonpatronage deductions, unless a 

Specified Cooperative treats all of its 

nonpatronage gross receipts and related 

deductions as patronage as described in 

paragraph (b)(2)(ii) of this section. For 

purposes of determining the amount of 

the nonpatronage section 199A(g) 

deduction allowed under paragraph 

(b)(5)(ii) of this section, taxable income 

is limited to taxable income and related 

deductions from nonpatronage sources. 

Nonpatronage NOLs reduce taxable 

income. Taxable income is computed 

without taking into account the section 

199A(g) deduction or any deduction 

allowable under section 1382(c). 

(ii) Use of nonpatronage section 

199A(g) deduction. Except as provided 

in § 1.199A–12(c)(2) related to the rules 

for EAGs, the nonpatronage section 

199A(g) deduction cannot create or 

increase a nonpatronage NOL or the 

amount of nonpatronage NOL carryover 

or carryback, if applicable, in 

accordance with section 172. A 

Specified Cooperative cannot pass 

through its nonpatronage section 

199A(g) deduction under paragraph (d) 

of this section and can apply the 

nonpatronage section 199A(g) deduction 

only against its nonpatronage income 

and deductions. As is the case for the 

patronage section 199A(g) deduction, 

the nonpatronage section 199A(g) 

deduction that a Specified Cooperative 

does not use in the appropriate taxable 

year is lost. 

(d) Discretion to pass through 

deduction—(1)(i) In general. A Specified 

Cooperative may, at its discretion, pass 

through all, some, or none of its 

patronage section 199A(g) deduction to 

all patrons. Only eligible taxpayers as 

defined in section 199A(g)(2)(D) may 

claim the section 199A(g) deduction 

that is passed through. A Specified 

Cooperative member of a federated 

cooperative may pass through the 

patronage section 199A(g) deduction it 

receives from the federated cooperative 

to its member patrons. 

(ii) Specified Cooperative identifies 

eligibility of patron. If a Specified 

Cooperative determines that a patron is 

not an eligible taxpayer, then the 

Specified Cooperative may, at its 

discretion, retain any of the patronage 

section 199A(g) deduction attributable 

to the patron that would otherwise be 

passed through and lost under the 

general rule in paragraph (d)(1)(i) of this 

section. 

(2) Amount of deduction being passed 

through—(i) In general. A Specified 

Cooperative is permitted to pass through 

an amount equal to the portion of the 

Specified Cooperative’s section 199A(g) 

deduction that is allowed with respect 

to the portion of the cooperative’s QPAI 

that is attributable to the qualified 

payments the Specified Cooperative 

distributed to the patron during the 

taxable year and identified on the notice 

required in § 1.199A–7(f)(3) on an 

attachment to or on the Form 1099– 

PATR, Taxable Distributions Received 

From Cooperatives (Form 1099–PATR), 

(or any successor form) issued by the 

Specified Cooperative to the patron, 

unless otherwise provided by the 

instructions to the Form. The notice 

requirement to pass through the section 

199A(g) deduction is in paragraph (d)(3) 

of this section. 

(ii) Qualified payment means any 

amount of a patronage dividend or perunit retain allocation, as described in 

section 1385(a)(1) or (3) received by a 

patron from a Specified Cooperative that 

is attributable to the portion of the 

Specified Cooperative’s QPAI, for which 

the cooperative is allowed a section 

199A(g) deduction. For this purpose, 

patronage dividends include any 

advances on patronage and per-unit 

retain allocations include per-unit 

retains paid in money during the taxable 

year. 

(3) Notice requirement to pass 

through deduction. A Specified 

Cooperative must identify in a written 

notice the amount of the section 199A(g) 

deduction being passed through to its 

patrons. This written notice must be 

mailed by the Specified Cooperative to 

the patron no later than the 15th day of 

the ninth month following the close of 

the taxable year of the Specified 

Cooperative. The Specified Cooperative 

may use the same written notice, if any, 


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that it uses to notify the patron of the 

patron’s respective allocations of 

patronage distributions, or may use a 

separate timely written notice(s) to 

comply with this section. The Specified 

Cooperative must report the amount of 

section 199A(g) deduction passed 

through to the patron on an attachment 

to or on the Form 1099–PATR (or any 

successor form) issued by the Specified 

Cooperative to the patron, unless 

otherwise provided by the instructions 

to the Form. 

(4) Section 199A(g) deduction 

allocated to eligible taxpayer. An 

eligible taxpayer may deduct the lesser 

of the section 199A(g) deduction 

identified on the notice described in 

paragraph (d)(3) of this section or the 

eligible taxpayer’s taxable income in the 

taxable year in which the eligible 

taxpayer receives the timely written 

notice described in paragraph (d)(3) of 

this section. For this purpose, the 

eligible taxpayer’s taxable income is 

determined without taking into account 

the section 199A(g) deduction being 

passed through to the eligible taxpayer 

and after taking into account any section 

199A(a) deduction allowed to the 

eligible taxpayer. Any section 199A(g) 

deduction the eligible taxpayer does not 

use in the taxable year in which the 

eligible taxpayer receives the notice 

(received on or before the due date of 

the Form 1099–PATR) is lost and cannot 

be carried forward or back to other 

taxable years. The taxable income 

limitation for the section 199A(a) 

deduction set forth in section 199A(b)(3) 

and § 1.199A–1(a) and (b) does not 

apply to limit the deductibility of the 

section 199A(g) deduction passed 

through to the eligible taxpayer. 

(5) Special rules for eligible taxpayers 

that are Specified Cooperatives. Any 

Specified Cooperative that receives a 

section 199A(g) deduction as an eligible 

taxpayer can take the deduction against 

patronage gross income and related 

deductions to the extent it relates to its 

patronage gross income and related 

deductions. Only a patron that is an 

exempt Specified Cooperative may take 

a section 199A(g) deduction passed 

through from another Specified 

Cooperative if the deduction relates to 

the patron Specified Cooperative’s 

nonpatronage gross income and related 

deductions. 

(6) W–2 wage limitation. The W–2 

wage limitation described in paragraph 

(b)(5)(ii)(B) of this section is applied at 

the cooperative level whether or not the 

Specified Cooperative chooses to pass 

through some or all of the section 

199A(g) deduction. Any section 199A(g) 

deduction that has been passed through 

by a Specified Cooperative to an eligible 

taxpayer is not subject to the W–2 wage 

limitation a second time at the eligible 

taxpayer’s level. 

(7) Specified Cooperative denied 

section 1382 deduction for portion of 

qualified payments. A Specified 

Cooperative must reduce its section 

1382 deduction by an amount equal to 

the portion of any qualified payment 

that is attributable to the Specified 

Cooperative’s section 199A(g) deduction 

passed through. This means the 

Specified Cooperative must reduce its 

section 1382 deduction in an amount 

equal to the section 199A(g) deduction 

passed through. 

(8) No double counting. A qualified 

payment received by a Specified 

Cooperative that is a patron of a 

Specified Cooperative is not taken into 

account by the patron for purposes of 

section 199A(g). 

(e) Examples. The following examples 

illustrate the application of paragraphs 

(a), (b), (c), and (d) of this section. The 

examples of this section apply solely for 

purposes of section 199A of the Code. 

Assume for each example that the 

Specified Cooperative sent all required 

notices to patrons on or before the due 

date of the Form 1099–PATR. 

(1) Example 1. Nonexempt Specified 

Cooperative calculating section 199A(g) 

deduction. (i) C is a grain marketing 

nonexempt Specified Cooperative, with 

$5,250,000 in gross receipts during 2020 

from the sale of grain grown by its 

patrons. C paid $4,000,000 to its patrons 

at the time the grain was delivered in 

the form of per-unit retain allocations 

and another $1,000,000 in patronage 

dividends after the close of the 2020 

taxable year. C has other expenses of 

$250,000 during 2020, including 

$100,000 of W–2 wages. 

(ii) C has DPGR of $5,250,000 and 

QPAI as defined in § 1.199A–8(b)(4)(ii) 

of $5,000,000 for 2020. C’s section 

199A(g) deduction is equal to the least 

of 9% of QPAI ($450,000), 9% of taxable 

income ($450,000), or 50% of W–2 

wages ($50,000). C passes through the 

entire section 199A(g) deduction to its 

patrons. Accordingly, C reduces its 

$5,000,000 deduction allowable under 

section 1382(b) (relating to the 

$1,000,000 patronage dividends and 

$4,000,000 per-unit retain allocations) 

by $50,000. 

(2) Example 2. Nonexempt Specified 

Cooperative determines amounts 

included in QPAI and taxable income. 

(i) C, a nonexempt Specified 

Cooperative, offers harvesting services 

and markets the grain of patrons and 

nonpatrons. C had gross receipts from 

harvesting services and grain sales, and 

expenses related to both. All of C’s 

harvesting services were performed for 

their patrons, and 75% of the grain sales 

were for patrons. 

(ii) C identifies 75% of the gross 

receipts and related expenses from grain 

sales and 100% of the gross receipts and 

related expenses from the harvesting 

services as patronage sourced. C 

identifies 25% of the gross receipts and 

related expenses from grain sales as 

nonpatronage sourced. 

(iii) C does not include any 

nonpatronage gross receipts or related 

expenses from grain sales in either QPAI 

or taxable income when calculating the 

section 199A(g) deduction. C’s QPAI 

includes the patronage DPGR, less 

related expenses (allocable COGS, 

wages and other expenses). C’s taxable 

income includes the patronage gross 

receipts, whether such gross receipts are 

DPGR or non-DPGR. 

(iv) C allocates and reports patronage 

dividends to its harvesting patrons and 

grain marketing patrons. C also notifies 

its grain marketing patrons (in 

accordance with the requirements of 

§ 1.199A–7(f)(3)) that their patronage 

dividends are qualified payments used 

in C’s section 199A(g) computation. The 

patrons must use this information for 

purposes of computing their section 

199A(b)(7) reduction to their section 

199A(a) deduction (see § 1.199A–7(f)). 

(3) Example 3. Nonexempt Specified 

Cooperative with patronage and 

nonpatronage gross receipts and related 

deductions. (i) C, a nonexempt 

Specified Cooperative, markets corn 

grown by its patrons in the United 

States. For the calendar year ending 

December 31, 2020, C derives gross 

receipts from the marketing activity of 

$1,800. Such gross receipts qualify as 

DPGR. Assume C has $800 of expenses 

(including COGS, other expenses, and 

$400 of W–2 wages) properly allocable 

to DPGR, and a $1,000 deduction 

allowed under section 1382(b). C also 

derives gross receipts from 

nonpatronage sources in the amount of 

$500, and has nonpatronage deductions 

in the amount of $400 (including COGS, 

other expenses, and $100 of W–2 

wages). 

(ii) C does not include any gross 

receipts or deductions from 

nonpatronage sources when calculating 

the deduction under paragraph (b)(5)(ii) 

of this section. C’s QPAI and taxable 

income both equal $1,000 

($1,800¥800). C’s deduction under 

paragraph (b)(5)(ii) of this section for the 

taxable year is equal to $90 (9% of 

$1,000), which does not exceed $200 

(50% of C’s W–2 wages properly 

allocable to DPGR). C passes through 

$90 of the deduction to patrons and C 

reduces its section 1382(b) deduction by 

$90. 


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(4) Example 4. Exempt Specified 

Cooperative with patronage and 

nonpatronage income and deductions. 

(i) C, an exempt Specified Cooperative, 

markets corn MPGE by its patrons in the 

United States. For the calendar year 

ending December 31, 2020, C derives 

gross receipts from the marketing 

activity of $1,800. For this activity 

assume C has $800 of expenses 

(including COGS, other expenses, and 

$400 of W–2 wages) properly allocable 

to DPGR, and a $1,000 deduction under 

section 1382(b). C also derives gross 

receipts from nonpatronage sources in 

the amount of $500. Assume the gross 

receipts qualify as DPGR. For this 

activity assume C has $400 of expenses 

(including COGS, other expenses, and 

$20 of W–2 wages) properly allocable to 

DPGR and no deduction under section 

1382(c). 

(ii) C calculates two separate section 

199A(g) deduction amounts. C’s section 

199A(g) deduction attributable to 

patronage sources is the same as the 

deduction calculated by the nonexempt 

Specified Cooperative in Example 1 in 

paragraph (e)(1) of this section. 

(iii) C’s nonpatronage QPAI and 

taxable income is equal to $100 

($500¥$400). C’s deduction under 

paragraph (c)(4) of this section that 

directs C to use paragraph (b)(5)(ii) of 

this section attributable to nonpatronage 

sources is equal to $9 (9% of $100), 

which does not exceed $10 (50% of C’s 

W–2 wages properly allocable to DPGR). 

C cannot pass through any of the 

nonpatronage section 199A(g) deduction 

amount to its patrons. 

(5) Example 5. NOL. (i) In 2021, E, a 

nonexempt Specified Cooperative that is 

not part of an EAG, generates QPAI and 

taxable income of $100 (without taking 

into account any section 1382(b) 

deductions, NOLs, or the section 

199A(g) deduction). E pays out 

patronage dividends of $91 that are 

deductible under section 1382(b). E has 

an NOL carryover of $500 attributable to 

losses incurred prior to 2018. While 

taxable income and QPAI do not take 

into account the section 1382(b) 

deduction, taxable income does take 

into account NOLs. When calculating its 

section 199A(g) deduction, E must take 

into account the NOL carryover when 

calculating taxable income, unless the 

taxable income is the result of not taking 

into account any deduction allowable 

under section 1382(b). In this case $91 

of taxable income is the result of not 

taking into account the deduction 

allowed under section 1382(b) and the 

remaining $9 should be reduced by the 

NOL carryover so that taxable income 

equals $91. E calculates a section 

199A(g) deduction of $8.19 (.09 × $91 

(which is the lesser of $100 QPAI or $91 

taxable income)). 

(ii) E may pass through the entire 

$8.19 of section 199A(g) deduction to 

patrons (which will reduce its section 

1382(b) deduction from $91 to $82.81). 

However, if E does not pass the 

deduction through, paragraph (b)(6) of 

this section prohibits E from claiming 

any of the section 199A(g) deduction in 

2021. 

(iii) If E passes through the deduction 

to patrons, E’s taxable income under 

section 172(b)(2) for NOL absorption 

purposes is $9 ($100¥$82.81¥$9 

NOL¥$8.19 section 199A(g) deduction). 

If E does not pass through the 

deduction, then E’s taxable income 

under section 172(b)(2) for NOL 

absorption purposes is $9 

($100¥$91¥$9 NOL). 

(iv) Assuming E passes through the 

deduction to patrons, E would use $9 of 

the NOL carryover and have a $491 NOL 

carryover remaining. To the extent E 

does not pass through the deduction, E 

would still use $9 of the NOL carryover 

and have a $491 NOL carryover 

remaining. 

(6) Example 6. Nonexempt Specified 

Cooperative not passing through the 

section 199A(g) deduction to patrons. (i) 

D, a nonexempt Specified Cooperative, 

markets corn grown by its patrons 

within the United States. For its 

calendar year ended December 31, 2020, 

D has gross receipts of $1,500,000, all 

derived from the sale of corn grown by 

its patrons within the United States. D 

pays $300,000 for its patrons’ corn at the 

time the grain was delivered in the form 

of per-unit retain allocations and its W– 

2 wages (as defined in § 1.199A–11)) for 

2020 total $200,000. D has no other 

costs. Patron A is a patron of D. Patron 

A is a cash basis taxpayer and files 

Federal income tax returns on a 

calendar year basis. All corn grown by 

Patron A in 2020 is sold through D and 

Patron A is eligible to share in patronage 

dividends paid by D for that year. 

(ii) All of D’s gross receipts from the 

sale of its patrons’ corn qualify as DPGR 

(as defined paragraph (8)(b)(3)(ii) of this 

section). D’s QPAI and taxable income 

is $1,300,000. D’s section 199A(g) 

deduction for its taxable year 2020 is 

$117,000 (.09 × $1,300,000). Because 

this amount is less than 50% of 

Cooperative X’s W–2 wages, the entire 

amount is allowed as a section 199A(g) 

deduction. D decides not to pass any of 

its section 199A(g) deduction to its 

patrons. The section 199A(g) deduction 

of $117,000 is applied to, and reduces, 

D’s taxable income. 

(7) Example 7. Nonexempt Specified 

Cooperative passing through the section 

199A(g) deduction to patrons paid a 

patronage dividend. (i) The facts are the 

same as in Example 6 except that D 

decides to pass its entire section 

199A(g) deduction through to its 

patrons. D declares a patronage 

dividend for its 2020 taxable year of 

$1,000,000, which it pays on March 15, 

2021. Pursuant to paragraph (d)(3) of 

this section, D notifies patrons in 

written notices that accompany the 

patronage dividend notification that D is 

allocating to them the section 199A(g) 

deduction D is entitled to claim in the 

calendar year 2020. On March 15, 2021, 

Patron A receives a $10,000 patronage 

dividend that is a qualified payment 

under paragraph (d)(2)(ii) of this section 

from D. In the notice that accompanies 

the patronage dividend, Patron A is 

designated a $1,170 section 199A(g) 

deduction. Under paragraph (a) of this 

section, Patron A may claim a $1,170 

section 199A(g) deduction for the 

taxable year ending December 31, 2021, 

subject to the limitations set forth under 

paragraph (d)(4) of this section. D must 

report the allowable amount of Patron 

A’s section 199A(g) deduction on Form 

1099–PATR, ‘‘Taxable Distributions 

Received From Cooperatives,’’ issued to 

Patron A for the calendar year 2021. 

(ii) Under paragraph (d)(7) of this 

section, D is required to reduce its 

section 1382 deduction of $1,300,000 by 

the $117,000 section 199A(g) deduction 

passed through to patrons (whether D 

pays patronage dividends on book or 

Federal income tax net earnings). As a 

consequence, D is entitled to a section 

1382 deduction for the taxable year 

ending December 31, 2020, in the 

amount of $1,183,000 

($1,300,000¥$117,000) and to a section 

199A(g) deduction in the amount of 

$117,000 ($1,300,000 × .09). Its taxable 

income for 2020 is $0. 

(8) Example 8. Nonexempt Specified 

Cooperative passing through the section 

199A(g) deduction to patrons paid a 

patronage dividend and advances on 

expected patronage net earnings. (i) The 

facts are the same as in Example 6 

except that D paid out $500,000 to its 

patrons as advances on expected 

patronage net earnings. In 2020, D pays 

its patrons a $500,000 

($1,000,000¥$500,000 already paid) 

patronage dividend in cash or a 

combination of cash and qualified 

written notices of allocation. Under 

paragraph (d)(7) of this section and 

section 1382, D is allowed a deduction 

of $1,183,000 ($1,300,000¥$117,000 

section 199A(g) deduction), whether 

patronage net earnings are distributed 

on book or Federal income tax net 

earnings. 

(ii) The patrons will have received a 

gross amount of $1,300,000 in qualified 


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payments under paragraph (d)(2)(ii) of 

this section from Cooperative D 

($300,000 paid as per-unit retain 

allocations, $500,000 paid during the 

taxable year as advances, and the 

additional $800,000 paid as patronage 

dividends). If D passes through its entire 

section 199A(g) deduction to its patrons 

by providing the notice required by 

paragraph (d)(3) of this section, then the 

patrons will be allowed a $117,000 

section 199A(g) deduction, resulting in 

a net $1,183,000 taxable distribution 

from D. Pursuant to paragraph (d)(8) of 

this section, any of the $1,300,000 

received by patrons that are Specified 

Cooperatives from D is not taken into 

account for purposes of calculating the 

patrons’ section 199A(g) deduction. 

Patrons that are not Specified 

Cooperatives must include those 

payments in the section 199A(b)(7) 

reduction when calculating a section 

199A(a) deduction as applicable. 

(9) Example 9. Intangible property 

transaction as part of disposition of 

agricultural or horticultural products. F, 

a Specified Cooperative, markets 

patrons’ oranges by processing the 

oranges into orange juice, and then 

bottling and selling the orange juice to 

customers. F markets the orange juice 

under its own brand name, but F also 

licenses from G, an unrelated third 

party, the rights to use G’s brand name 

on the bottled orange juice. F’s gross 

receipts from the sale of both brands of 

orange juice qualify as DPGR, assuming 

all other requirements of this section are 

met. 

(10) Example 10. Intangible property 

transaction that is not a disposition of 

an agricultural or horticultural product. 

H, a Specified Cooperative, licenses H’s 

brand name to J, an unrelated third 

party. J purchases oranges, produces 

orange juice, and then bottles and sells 

the orange juice to customers. Gross 

receipts that H derives from the license 

of the brand name to J are not DPGR 

from the disposition of an agricultural 

or horticultural product. 

(11) Example 11. Allocation rules 

when Specified Cooperative retains the 

section 199A(g) deduction attributable 

to non-eligible taxpayers. K, a Specified 

Cooperative, for the taxable year has 

$200 of taxable income and QPAI ($100 

is attributable to business done for 

patrons that are C corporation patrons 

and $100 is attributable to business 

done for patrons that are eligible 

taxpayers). K calculates an $18 section 

199A(g) deduction. K passes through $9 

to its patrons that are eligible taxpayers, 

distributes $191 to patrons in 

distributions that are deductible under 

section 1382(b) (including patronage 

dividends that were paid out in the 

same amounts to C corporation patrons 

and eligible taxpayer patrons because 

the value of their business,$100 each, 

was the same), and adjusts its deduction 

under section 1382 by $9 (the amount 

of the section 199A(g) deduction passed 

through). K’s taxable income after the 

section 199A deduction and 

distributions is $0. 

(f) Special rule for Specified 

Cooperative partners. In the case 

described in section 199A(g)(5)(B), 

where a Specified Cooperative is a 

partner in a partnership, the partnership 

must separately identify and report on 

the Schedule K–1 of the Form 1065, 

U.S. Return of Partnership Income (or 

any successor form) issued to the 

Specified Cooperative partner the 

cooperative’s share of gross receipts and 

related deductions, unless otherwise 

provided by the instructions to the 

Form. The Specified Cooperative 

partner determines what gross receipts 

reported by the partnership qualify as 

DPGR and includes these gross receipts 

and related deductions, W–2 wages, and 

COGS to calculate one section 199A(g) 

deduction (in the case of a nonexempt 

Specified Cooperative) or two section 

199A(g) deductions (in the case of an 

exempt Specified Cooperative) using the 

steps set forth in paragraphs (b) and (c) 

of this section. For purposes of 

determining whether gross receipts are 

DPGR, the MPGE activities of the 

Specified Cooperative partner may be 

attributed to the partnership, and the 

partnership’s MPGE activities may be 

attributed to the Specified Cooperative 

partner. 

(g) Recapture of section 199A(g) 

deduction. If the amount of the section 

199A(g) deduction that was passed 

through to eligible taxpayers exceeds 

the amount allowable as a section 

199A(g) deduction as determined on 

examination or reported on an amended 

return, then recapture of the excess will 

occur at the Specified Cooperative level 

in the taxable year the Specified 

Cooperative took the excess section 

199A(g) deduction. 

(h) Applicability date. Except as 

provided in paragraph (h)(2) of 

§ 1.199A–7, the provisions of this 

section apply to taxable years beginning 

after January 19, 2021. Taxpayers, 

however, may choose to apply the rules 

of §§ 1.199A–7 through 1.199A–12 for 

taxable years beginning on or before that 

date, provided the taxpayers apply the 

rules in their entirety and in a 

consistent manner. 

§ 1.199A–9 Domestic production gross 

receipts. 

(a) Domestic production gross 

receipts—(1) In general. The provisions 

of this section apply solely for purposes 

of section 199A(g) of the Internal 

Revenue Code (Code). The provisions of 

this section provide guidance to 

determine what gross receipts (defined 

in § 1.199A–8(b)(2)(iii)) are domestic 

production gross receipts (DPGR) 

(defined in § 1.199A–8(b)(3)(ii)). DPGR 

does not include gross receipts derived 

from services or the lease, rental, 

license, sale, exchange, or other 

disposition of land unless a de minimis 

or other exception applies. Partners, 

including partners in an EAG 

partnership described in § 1.199A– 

12(i)(1), may not treat guaranteed 

payments under section 707(c) as DPGR. 

(2) Application to marketing 

cooperatives. For purposes of 

determining DPGR, a Specified 

Cooperative (defined in § 1.199A– 

8(a)(2)) will be treated as having 

manufactured, produced, grown, or 

extracted (MPGE) (defined in paragraph 

(f) of this section) in whole or 

significant part (defined in paragraph 

(h) of this section) any agricultural or 

horticultural product (defined in 

§ 1.199A–8(a)(4)) within the United 

States (defined in paragraph (i) of this 

section) marketed by the Specified 

Cooperative which its patrons (defined 

in § 1.1388–1(e)) have so MPGE. 

(b) Related persons—(1) In general. 

Pursuant to section 199A(g)(3)(D)(ii), 

DPGR does not include any gross 

receipts derived from agricultural or 

horticultural products leased, licensed, 

or rented by the Specified Cooperative 

for use by any related person. A person 

is treated as related to another person if 

both persons are treated as a single 

employer under either section 52(a) or 

(b) (without regard to section 1563(b)), 

or section 414(m) or (o). Any other 

person is an unrelated person for 

purposes of the section 199A(g) 

deduction. 

(2) Exceptions. Notwithstanding 

paragraph (b)(1) of this section, gross 

receipts derived from any agricultural or 

horticultural product leased or rented 

by the Specified Cooperative to a related 

person may qualify as DPGR if the 

agricultural or horticultural product is 

held for sublease or rent, or is subleased 

or rented, by the related person to an 

unrelated person for the ultimate use of 

the unrelated person. Similarly, 

notwithstanding paragraph (b)(1) of this 

section, gross receipts derived from a 

license of the right to reproduce an 

agricultural or horticultural product to a 

related person for reproduction and 

sale, exchange, lease, or rental to an 

unrelated person for the ultimate use of 

the unrelated person are treated as gross 

receipts from a disposition of an 


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agricultural or horticultural product and 

may qualify as DPGR. 

(c) Allocating gross receipts—(1) In 

general. A Specified Cooperative must 

determine the portion of its gross 

receipts for the taxable year that is 

DPGR and the portion of its gross 

receipts that is non-DPGR using a 

reasonable method based on all the facts 

and circumstances. Applicable Federal 

income tax principles apply to 

determine whether a transaction is, in 

substance, a lease, rental, license, sale, 

exchange, or other disposition the gross 

receipts of which may constitute DPGR, 

whether it is a service the gross receipts 

of which may constitute non-DPGR, or 

some combination thereof. For example, 

if a Specified Cooperative sells an 

agricultural or horticultural product 

and, in connection with that sale, also 

provides services, the Specified 

Cooperative must allocate its gross 

receipts from the transaction using a 

reasonable method based on all the facts 

and circumstances that accurately 

identifies the gross receipts that 

constitute DPGR and non-DPGR in 

accordance with the requirements of 

§ 1.199A–8(b) and/or (c). The chosen 

reasonable method must be consistently 

applied from one taxable year to another 

and must clearly reflect the portion of 

gross receipts for the taxable year that is 

DPGR and the portion of gross receipts 

that is non-DPGR. The books and 

records maintained for gross receipts 

must be consistent with any allocations 

under this paragraph (c)(1). 

(2) Reasonable method of allocation. 

If a Specified Cooperative has the 

information readily available and can, 

without undue burden or expense, 

specifically identify whether the gross 

receipts are derived from an item (and 

thus, are DPGR), then the Specified 

Cooperative must use that specific 

identification to determine DPGR. If the 

Specified Cooperative does not have 

information readily available to 

specifically identify whether gross 

receipts are derived from an item or 

cannot, without undue burden or 

expense, specifically identify whether 

gross receipts are derived from an item, 

then the Specified Cooperative is not 

required to use a method that 

specifically identifies whether the gross 

receipts are derived from an item but 

can use a reasonable allocation method. 

Factors taken into consideration in 

determining whether the Specified 

Cooperative’s method of allocating gross 

receipts between DPGR and non-DPGR 

is reasonable include whether the 

Specified Cooperative uses the most 

accurate information available; the 

relationship between the gross receipts 

and the method used; the accuracy of 

the method chosen as compared with 

other possible methods; whether the 

method is used by the Specified 

Cooperative for internal management or 

other business purposes; whether the 

method is used for other Federal or state 

income tax purposes; the time, burden, 

and cost of using alternative methods; 

and whether the Specified Cooperative 

applies the method consistently from 

year to year. 

(3) De minimis rules—(i) DPGR. A 

Specified Cooperative’s applicable gross 

receipts as provided in § 1.199A–8(b) 

and/or (c) may be treated as DPGR if less 

than 10 percent of the Specified 

Cooperative’s total gross receipts are 

non-DPGR (after application of the 

exceptions provided in § 1.199A– 

9(j)(3)). If the amount of the Specified 

Cooperative’s gross receipts that are 

non-DPGR equals or exceeds 10 percent 

of the Specified Cooperative’s total gross 

receipts, then, except as provided in 

paragraph (c)(3)(ii) of this section, the 

Specified Cooperative is required to 

allocate all gross receipts between DPGR 

and non-DPGR in accordance with 

paragraph (c)(1) of this section. If a 

Specified Cooperative is a member of an 

expanded affiliated group (EAG) 

(defined in § 1.199A–12), but is not a 

member of a consolidated group, then 

the determination of whether less than 

10 percent of the Specified 

Cooperative’s total gross receipts are 

non-DPGR is made at the Specified 

Cooperative level. If a Specified 

Cooperative is a member of a 

consolidated group, then the 

determination of whether less than 10 

percent of the Specified Cooperative’s 

total gross receipts are non-DPGR is 

made at the consolidated group level. 

See § 1.199A–12(d). 

(ii) Non-DPGR. A Specified 

Cooperative’s applicable gross receipts 

as provided in §§ 1.199A–8(b) and/or (c) 

may be treated as non-DPGR if less than 

10 percent of the Specified 

Cooperative’s total gross receipts are 

DPGR. If a Specified Cooperative is a 

member of an EAG, but is not a member 

of a consolidated group, then the 

determination of whether less than 10 

percent of the Specified Cooperative’s 

total gross receipts are DPGR is made at 

the Specified Cooperative level. If a 

Specified Cooperative is a member of a 

consolidated group, then the 

determination of whether less than 10 

percent of the Specified Cooperative’s 

total gross receipts are DPGR is made at 

the consolidated group level. 

(d) Use of historical data for multipleyear transactions. If a Specified 

Cooperative recognizes and reports 

gross receipts from upfront payments or 

other similar payments on a Federal 

income tax return for a taxable year, 

then the Specified Cooperative’s use of 

historical data in making an allocation 

of gross receipts from the transaction 

between DPGR and non-DPGR may 

constitute a reasonable method. If a 

Specified Cooperative makes allocations 

using historical data, and subsequently 

updates the data, then the Specified 

Cooperative must use the more recent or 

updated data, starting in the taxable 

year in which the update is made. 

(e) Determining DPGR item-by-item— 

(1) In general. For purposes of the 

section 199A(g) deduction, a Specified 

Cooperative determines, using a 

reasonable method based on all the facts 

and circumstances, whether gross 

receipts qualify as DPGR on an item-byitem basis (and not, for example, on a 

division-by-division, product line-byproduct line, or transaction-bytransaction basis). The chosen 

reasonable method must be consistently 

applied from one taxable year to another 

and must clearly reflect the portion of 

gross receipts that is DPGR. The books 

and records maintained for gross 

receipts must be consistent with any 

allocations under this paragraph (e)(1). 

(i) The term item means the 

agricultural or horticultural product 

offered by the Specified Cooperative in 

the normal course of its trade or 

business for lease, rental, license, sale, 

exchange, or other disposition (for 

purposes of this paragraph (e), 

collectively referred to as disposition) to 

customers, if the gross receipts from the 

disposition of such product qualify as 

DPGR; or 

(ii) If paragraph (e)(1)(i) of this section 

does not apply to the product, then any 

component of the product described in 

paragraph (e)(1)(i) of this section is 

treated as the item, provided that the 

gross receipts from the disposition of 

the product described in paragraph 

(e)(1)(i) of this section that are 

attributable to such component qualify 

as DPGR. Each component that meets 

the requirements under this paragraph 

(e)(1)(ii) must be treated as a separate 

item and a component that meets the 

requirements under this paragraph 

(e)(1)(ii) may not be combined with a 

component that does not meet these 

requirements. 

(2) Special rules. (i) For purposes of 

paragraph (e)(1)(i) of this section, in no 

event may a single item consist of two 

or more products unless those products 

are offered for disposition, in the normal 

course of the Specified Cooperative’s 

trade or business, as a single item 

(regardless of how the products are 

packaged). 

(ii) In the case of agricultural or 

horticultural products customarily sold 


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by weight or by volume, the item is 

determined using the most common 

custom of the industry (for example, 

barrels of oil). 

(3) Exception. If the Specified 

Cooperative MPGE agricultural or 

horticultural products within the United 

States that it disposes of, and the 

Specified Cooperative leases, rents, 

licenses, purchases, or otherwise 

acquires property that contains or may 

contain the agricultural or horticultural 

products (or a portion thereof), and the 

Specified Cooperative cannot 

reasonably determine, without undue 

burden and expense, whether the 

acquired property contains any of the 

original agricultural or horticultural 

products MPGE by the Specified 

Cooperative, then the Specified 

Cooperative is not required to determine 

whether any portion of the acquired 

property qualifies as an item for 

purposes of paragraph (e)(1) of this 

section. Therefore, the gross receipts 

derived from the disposition of the 

acquired property may be treated as 

non-DPGR. Similarly, the preceding 

sentences apply if the Specified 

Cooperative can reasonably determine 

that the acquired property contains 

agricultural or horticultural products (or 

a portion thereof) MPGE by the 

Specified Cooperative, but cannot 

reasonably determine, without undue 

burden or expense, how much, or what 

type, grade, etc., of the agricultural or 

horticultural MPGE by the Specified 

Cooperative the acquired property 

contains. 

(f) Definition of manufactured, 

produced, grown, or extracted (MPGE)— 

(1) In general. Except as provided in 

paragraphs (f)(2) and (3) of this section, 

the term MPGE includes manufacturing, 

producing, growing, extracting, 

installing, developing, improving, and 

creating agricultural or horticultural 

products; making agricultural or 

horticultural products out of material by 

processing, manipulating, refining, or 

changing the form of an article, or by 

combining or assembling two or more 

articles; cultivating soil, raising 

livestock, and farming aquatic products. 

The term MPGE also includes storage, 

handling, or other processing activities 

(other than transportation activities) 

within the United States related to the 

sale, exchange, or other disposition of 

agricultural or horticultural products 

only if the products are consumed in 

connection with or incorporated into 

the MPGE of agricultural or 

horticultural products, whether or not 

by the Specified Cooperative. The 

Specified Cooperative (or the patron if 

§ 1.199A–9(a)(2) applies) must have the 

benefits and burdens of ownership of 

the agricultural or horticultural 

products under Federal income tax 

principles during the period the MPGE 

activity occurs for the gross receipts 

derived from the MPGE of the 

agricultural or horticultural products to 

qualify as DPGR. 

(2) Packaging, repackaging, or 

labeling. If the Specified Cooperative 

packages, repackages, or labels 

agricultural or horticultural products 

and engages in no other MPGE activity 

with respect to those agricultural or 

horticultural products, the packaging, 

repackaging, or labeling does not qualify 

as MPGE with respect to those 

agricultural or horticultural products. 

(3) Installing. If a Specified 

Cooperative installs agricultural or 

horticultural products and engages in no 

other MPGE activity with respect to the 

agricultural or horticultural products, 

the Specified Cooperative’s installing 

activity does not qualify as an MPGE 

activity. Notwithstanding paragraph 

(j)(3)(i)(A) of this section, if the 

Specified Cooperative installs 

agricultural or horticultural products 

MPGE by the Specified Cooperative and 

the Specified Cooperative has the 

benefits and burdens of ownership of 

the agricultural or horticultural 

products under Federal income tax 

principles during the period the 

installing activity occurs, then the 

portion of the installing activity that 

relates to the agricultural or 

horticultural products is an MPGE 

activity. 

(4) Consistency with section 263A. A 

Specified Cooperative that has MPGE 

agricultural or horticultural products for 

the taxable year must treat itself as a 

producer under section 263A with 

respect to the agricultural or 

horticultural products unless the 

Specified Cooperative is not subject to 

section 263A. A Specified Cooperative 

that currently is not properly accounting 

for its production activities under 

section 263A, and wishes to change its 

method of accounting to comply with 

the producer requirements of section 

263A, must follow the applicable 

administrative procedures issued under 

§ 1.446–1(e)(3)(ii) for obtaining the 

Commissioner’s consent to a change in 

accounting method (for further 

guidance, for example, see Rev. Proc. 

2015–13, 2015–5 IRB 419, or any 

applicable subsequent guidance (see 

§ 601.601(d)(2) of this chapter)). 

(5) Examples. The following examples 

illustrate the application of paragraphs 

(f)(1), (2), and (3) of this section. 

(i) Example 1. MPGE activities 

conducted within United States. A, B, 

and C are unrelated persons. A is a 

Specified Cooperative, B is an 

individual patron of A, and C is a C 

corporation. B grows agricultural 

products outside of the United States 

and A markets those agricultural 

products for B. A stores the agricultural 

products in agricultural storage bins in 

the United States and has the benefits 

and burdens of ownership under 

Federal income tax principles of the 

agricultural products while they are 

being stored. A sells the agricultural 

products to C, who processes them into 

refined agricultural products in the 

United States. The gross receipts from 

A’s activities are DPGR from the MPGE 

of agricultural products. 

(ii) Example 2. MPGE activities 

conducted within and outside United 

States. The facts are the same as in 

Example 1 except that B grows the 

agricultural products outside the United 

States and C processes them into refined 

agricultural products outside the United 

States. Pursuant to paragraph (f)(1) of 

this section, the gross receipts derived 

by A from its sale of the agricultural 

products to C are DPGR from the MPGE 

of agricultural products within the 

United States. 

(g) By the taxpayer. With respect to 

the exception of the rules applicable to 

an EAG and EAG partnerships under 

§ 1.199A–12, only one Specified 

Cooperative may claim the section 

199A(g) deduction with respect to any 

qualifying activity under paragraph (f) 

of this section performed in connection 

with the same agricultural or 

horticultural product. If an unrelated 

party performs a qualifying activity 

under paragraph (f) of this section 

pursuant to a contract with a Specified 

Cooperative (or its patron as relevant 

under paragraph (a)(2) of this section), 

then only if the Specified Cooperative 

(or its patron) has the benefits and 

burdens of ownership of the agricultural 

or horticultural product under Federal 

income tax principles during the period 

in which the qualifying activity occurs 

is the Specified Cooperative (or its 

patron) treated as engaging in the 

qualifying activity. 

(h) In whole or significant part 

defined—(1) In general. Agricultural or 

horticultural products must be MPGE in 

whole or significant part by the 

Specified Cooperative (or its patrons in 

the case described in paragraph (a)(2) of 

this section) and in whole or significant 

part within the United States to qualify 

under section 199A(g)(3)(D)(i). If a 

Specified Cooperative enters into a 

contract with an unrelated person for 

the unrelated person to MPGE 

agricultural or horticultural products for 

the Specified Cooperative and the 

Specified Cooperative has the benefits 

and burdens of ownership of the 


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agricultural or horticultural products 

under applicable Federal income tax 

principles during the period the MPGE 

activity occurs, then, pursuant to 

paragraph (g) of this section, the 

Specified Cooperative is considered to 

MPGE the agricultural or horticultural 

products under this section. The 

unrelated person must perform the 

MPGE activity on behalf of the Specified 

Cooperative in whole or significant part 

within the United States in order for the 

Specified Cooperative to satisfy the 

requirements of this paragraph (h)(1). 

(2) Substantial in nature. Agricultural 

or horticultural products will be treated 

as MPGE in whole or in significant part 

by the Specified Cooperative (or its 

patrons in the case described in 

paragraph (a)(2) of this section) within 

the United States for purposes of 

paragraph (h)(1) of this section. 

However, MPGE of the agricultural or 

horticultural products by the Specified 

Cooperative within the United States 

must be substantial in nature taking into 

account all the facts and circumstances, 

including the relative value added by, 

and relative cost of, the Specified 

Cooperative’s MPGE within the United 

States, the nature of the agricultural or 

horticultural products, and the nature of 

the MPGE activity that the Specified 

Cooperative performs within the United 

States. The MPGE of a key component 

of an agricultural or horticultural 

product does not, in itself, meet the 

substantial-in-nature requirement with 

respect to an agricultural or 

horticultural product under this 

paragraph (h)(2). In the case of an 

agricultural or horticultural product, 

research and experimental activities 

under section 174 and the creation of 

intangible assets are not taken into 

account in determining whether the 

MPGE of the agricultural or 

horticultural product is substantial in 

nature. 

(3) Safe harbor—(i) In general. A 

Specified Cooperative (or its patrons in 

the case described in paragraph (a)(2) of 

this section) will be treated as having 

MPGE an agricultural or horticultural 

product in whole or in significant part 

within the United States for purposes of 

paragraph (h)(1) of this section if the 

direct labor and overhead of such 

Specified Cooperative to MPGE the 

agricultural or horticultural product 

within the United States account for 20 

percent or more of the Specified 

Cooperative’s COGS of the agricultural 

or horticultural product, or in a 

transaction without COGS (for example, 

a lease, rental, or license), account for 

20 percent or more of the Specified 

Cooperative’s unadjusted depreciable 

basis (as defined in paragraph (h)(3)(ii) 

of this section) in property included in 

the definition of agricultural or 

horticultural products. For Specified 

Cooperatives subject to section 263A, 

overhead is all costs required to be 

capitalized under section 263A except 

direct materials and direct labor. For 

Specified Cooperatives not subject to 

section 263A, overhead may be 

computed using a reasonable method 

based on all the facts and 

circumstances, but may not include any 

cost, or amount of any cost, that would 

not be required to be capitalized under 

section 263A if the Specified 

Cooperative were subject to section 

263A. Research and experimental 

expenditures under section 174 and the 

costs of creating intangible assets are not 

taken into account in determining direct 

labor or overhead for any agricultural or 

horticultural product. In the case of 

agricultural or horticultural products, 

research and experimental expenditures 

under section 174 and any other costs 

incurred in the creation of intangible 

assets may be excluded from COGS or 

unadjusted depreciable basis for 

purposes of determining whether the 

Specified Cooperative meets the safe 

harbor under this paragraph (h)(3). For 

Specified Cooperatives not subject to 

section 263A, the chosen reasonable 

method to compute overhead must be 

consistently applied from one taxable 

year to another and must clearly reflect 

the Specified Cooperative’s portion of 

overhead not subject to section 263A. 

The method must also be reasonable 

based on all the facts and 

circumstances. The books and records 

maintained for overhead must be 

consistent with any allocations under 

this paragraph (h)(3)(i). 

(ii) Unadjusted depreciable basis. The 

term unadjusted depreciable basis 

means the basis of property for purposes 

of section 1011 without regard to any 

adjustments described in section 

1016(a)(2) and (3). This basis does not 

reflect the reduction in basis for— 

(A) Any portion of the basis the 

Specified Cooperative properly elects to 

treat as an expense under sections 179 

or 179C; or 

(B) Any adjustments to basis provided 

by other provisions of the Code and the 

regulations under the Code (for 

example, a reduction in basis by the 

amount of the disabled access credit 

pursuant to section 44(d)(7)). 

(4) Special rules—(i) Contract with an 

unrelated person. If a Specified 

Cooperative enters into a contract with 

an unrelated person for the unrelated 

person to MPGE an agricultural or 

horticultural product within the United 

States for the Specified Cooperative, and 

the Specified Cooperative is considered 

to MPGE the agricultural or 

horticultural product pursuant to 

paragraph (f)(1) of this section, then, for 

purposes of the substantial-in-nature 

requirement under paragraph (h)(2) of 

this section and the safe harbor under 

paragraph (h)(3)(i) of this section, the 

Specified Cooperative’s MPGE activities 

or direct labor and overhead must 

include both the Specified Cooperative’s 

MPGE activities or direct labor and 

overhead to MPGE the agricultural or 

horticultural product within the United 

States as well as the MPGE activities or 

direct labor and overhead of the 

unrelated person to MPGE the 

agricultural or horticultural product 

within the United States under the 

contract. 

(ii) Aggregation. In determining 

whether the substantial-in-nature 

requirement under paragraph (h)(2) of 

this section or the safe harbor under 

paragraph (h)(3)(i) of this section is met 

at the time the Specified Cooperative 

disposes of an agricultural or 

horticultural product— 

(A) An EAG member must take into 

account all the previous MPGE activities 

or direct labor and overhead of the other 

members of the EAG; 

(B) An EAG partnership as defined in 

§ 1.199A–12(i)(1) must take into account 

all of the previous MPGE activities or 

direct labor and overhead of all 

members of the EAG in which the 

partners of the EAG partnership are 

members (as well as the previous MPGE 

activities of any other EAG partnerships 

owned by members of the same EAG); 

and 

(C) A member of an EAG in which the 

partners of an EAG partnership are 

members must take into account all of 

the previous MPGE activities or direct 

labor and overhead of the EAG 

partnership (as well as those of any 

other members of the EAG and any 

previous MPGE activities of any other 

EAG partnerships owned by members of 

the same EAG). 

(i) United States defined. For 

purposes of section 199A(g), the term 

United States includes the 50 states, the 

District of Columbia, the territorial 

waters of the United States, and the 

seabed and subsoil of those submarine 

areas that are adjacent to the territorial 

waters of the United States and over 

which the United States has exclusive 

rights, in accordance with international 

law, with respect to the exploration and 

exploitation of natural resources. 

Consistent with its definition in section 

7701(a)(9), the term United States does 

not include possessions and territories 

of the United States or the airspace or 

space over the United States and these 

areas. 


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(j) Derived from the lease, rental, 

license, sale, exchange, or other 

disposition—(1) In general—(i) 

Definition. The term derived from the 

lease, rental, license, sale, exchange, or 

other disposition is defined as, and 

limited to, the gross receipts directly 

derived from the lease, rental, license, 

sale, exchange, or other disposition of 

agricultural or horticultural products 

even if the Specified Cooperative has 

already recognized receipts from a 

previous lease, rental, license, sale, 

exchange, or other disposition of the 

same agricultural or horticultural 

products. Applicable Federal income 

tax principles apply to determine 

whether a transaction is, in substance, a 

lease, rental, license, sale, exchange, or 

other disposition, whether it is a 

service, or whether it is some 

combination thereof. 

(ii) Lease income. The financing and 

interest components of a lease of 

agricultural or horticultural products are 

considered to be derived from the lease 

of such agricultural or horticultural 

products. However, any portion of the 

lease income that is attributable to 

services or non-qualified property as 

defined in paragraph (j)(3) of this 

section is not derived from the lease of 

agricultural or horticultural products. 

(iii) Income substitutes. The proceeds 

from business interruption insurance, 

governmental subsidies, and 

governmental payments not to produce 

are treated as gross receipts derived 

from the lease, rental, license, sale, 

exchange, or other disposition to the 

extent they are substitutes for gross 

receipts that would qualify as DPGR. 

(iv) Exchange of property—(A) 

Taxable exchanges. The value of 

property received by the Specified 

Cooperative in a taxable exchange of 

agricultural or horticultural products 

MPGE in whole or in significant part by 

the Specified Cooperative within the 

United States is DPGR for the Specified 

Cooperative (assuming all the other 

requirements of this section are met). 

However, unless the Specified 

Cooperative meets all of the 

requirements under this section with 

respect to any additional MPGE by the 

Specified Cooperative of the agricultural 

or horticultural products received in the 

taxable exchange, any gross receipts 

derived from the sale by the Specified 

Cooperative of the property received in 

the taxable exchange are non-DPGR, 

because the Specified Cooperative did 

not MPGE such property, even if the 

property was an agricultural or 

horticultural product in the hands of the 

other party to the transaction. 

(B) Safe harbor. For purposes of 

paragraph (j)(1)(iv)(A) of this section, 

the gross receipts derived by the 

Specified Cooperative from the sale of 

eligible property (as defined in 

paragraph (j)(1)(iv)(C) of this section) 

received in a taxable exchange, net of 

any adjustments between the parties 

involved in the taxable exchange to 

account for differences in the eligible 

property exchanged (for example, 

location differentials and product 

differentials), may be treated as the 

value of the eligible property received 

by the Specified Cooperative in the 

taxable exchange. For purposes of the 

preceding sentence, the taxable 

exchange is deemed to occur on the date 

of the sale of the eligible property 

received in the taxable exchange by the 

Specified Cooperative, to the extent the 

sale occurs no later than the last day of 

the month following the month in 

which the exchanged eligible property 

is received by the Specified 

Cooperative. In addition, if the 

Specified Cooperative engages in any 

further MPGE activity with respect to 

the eligible property received in the 

taxable exchange, then, unless the 

Specified Cooperative meets the inwhole-or-in-significant-part requirement 

under paragraph (h)(1) of this section 

with respect to the property sold, for 

purposes of this paragraph (j)(1)(iv)(B), 

the Specified Cooperative must also 

value the property sold without taking 

into account the gross receipts 

attributable to the further MPGE 

activity. 

(C) Eligible property. For purposes of 

paragraph (j)(1)(iv)(B) of this section, 

eligible property is— 

(1) Oil, natural gas, or petrochemicals, 

or products derived from oil, natural 

gas, or petrochemicals; or 

(2) Any other property or product 

designated by publication in the 

Internal Revenue Bulletin (see 

§ 601.601(d)(2)(ii)(b) of this chapter). 

(3) For this purpose, the term natural 

gas includes only natural gas extracted 

from a natural deposit and does not 

include, for example, methane gas 

extracted from a landfill. In the case of 

natural gas, production activities 

include all activities involved in 

extracting natural gas from the ground 

and processing the gas into pipeline 

quality gas. 

(2) Hedging transactions—(i) In 

general. For purposes of this section, if 

a transaction is a hedging transaction 

within the meaning of section 

1221(b)(2)(A) and § 1.1221–2(b), is 

properly identified as a hedging 

transaction in accordance with 

§ 1.1221–2(f), and the risk being hedged 

relates to property described in section 

1221(a)(1) that gives rise to DPGR or to 

property described in section 1221(a)(8) 

that is consumed in an activity that 

gives rise to DPGR, then— 

(A) In the case of a hedge of purchases 

of property described in section 

1221(a)(1), income, deduction, gain, or 

loss on the hedging transaction must be 

taken into account in determining 

COGS; 

(B) In the case of a hedge of sales of 

property described in section 1221(a)(1), 

income, deduction, gain, or loss on the 

hedging transaction must be taken into 

account in determining DPGR; and 

(C) In the case of a hedge of purchases 

of property described in section 

1221(a)(8), income, deduction, gain, or 

loss on the hedging transaction must be 

taken into account in determining 

DPGR. 

(ii) Allocation. The income, 

deduction, gain and loss from hedging 

transactions described in paragraph 

(j)(2) of this section must be allocated 

between the patronage and 

nonpatronage (defined in § 1.1388–1(f)) 

sourced income and related deductions 

of the Specified Cooperatives consistent 

with the cooperative’s method for 

determining patronage and 

nonpatronage income and deductions. 

(iii) Effect of identification and 

nonidentification. The principles of 

§ 1.1221–2(g) apply to a Specified 

Cooperative that identifies or fails to 

identify a transaction as a hedging 

transaction, except that the consequence 

of identifying as a hedging transaction a 

transaction that is not in fact a hedging 

transaction described in paragraph (j)(2) 

of this section, or of failing to identify 

a transaction that the Specified 

Cooperative has no reasonable grounds 

for treating as other than a hedging 

transaction described in paragraph (j)(2) 

of this section, is that deduction or loss 

(but not income or gain) from the 

transaction is taken into account under 

paragraph (j)(2) of this section. 

(iv) Other rules. See § 1.1221–2(e) for 

rules applicable to hedging by members 

of a consolidated group and § 1.446–4 

for rules regarding the timing of income, 

deductions, gains or losses with respect 

to hedging transactions. 

(3) Allocation of gross receipts to 

embedded services and non-qualified 

property—(i) Embedded services and 

non-qualified property—(A) In general. 

Except as otherwise provided in 

paragraph (j)(3)(i)(B) of this section, 

gross receipts derived from the 

performance of services do not qualify 

as DPGR. In the case of an embedded 

service, that is, a service the price of 

which, in the normal course of the 

business, is not separately stated from 

the amount charged for the lease, rental, 

license, sale, exchange, or other 

disposition of agricultural or 


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horticultural products, DPGR includes 

only the gross receipts derived from the 

lease, rental, license, sale, exchange, or 

other disposition of agricultural or 

horticultural products (assuming all the 

other requirements of this section are 

met) and not any receipts attributable to 

the embedded service. In addition, 

DPGR does not include gross receipts 

derived from the lease, rental, license, 

sale, exchange, or other disposition of 

property that does not meet all of the 

requirements under this section (nonqualified property). The allocation of 

the gross receipts attributable to the 

embedded services or non-qualified 

property will be deemed to be 

reasonable if the allocation reflects the 

fair market value of the embedded 

services or non-qualified property. 

(B) Exceptions. There are five 

exceptions to the rules under paragraph 

(j)(3)(i)(A) of this section regarding 

embedded services and non-qualified 

property. A Specified Cooperative may 

include in DPGR, if all the other 

requirements of this section are met 

with respect to the underlying item of 

agricultural or horticultural products to 

which the embedded services or nonqualified property relate, the gross 

receipts derived from— 

(1) A qualified warranty, that is, a 

warranty that is provided in connection 

with the lease, rental, license, sale, 

exchange, or other disposition of 

agricultural or horticultural products if, 

in the normal course of the Specified 

Cooperative’s business— 

(i) The price for the warranty is not 

separately stated from the amount 

charged for the lease, rental, license, 

sale, exchange, or other disposition of 

the agricultural or horticultural 

products; and 

(ii) The warranty is neither separately 

offered by the Specified Cooperative nor 

separately bargained for with customers 

(that is, a customer cannot purchase the 

agricultural or horticultural products 

without the warranty); 

(2) A qualified delivery, that is, a 

delivery or distribution service that is 

provided in connection with the lease, 

rental, license, sale, exchange, or other 

disposition of agricultural or 

horticultural products if, in the normal 

course of the Specified Cooperative’s 

business— 

(i) The price for the delivery or 

distribution service is not separately 

stated from the amount charged for the 

lease, rental, license, sale, exchange, or 

other disposition of the agricultural or 

horticultural products; and 

(ii) The delivery or distribution 

service is neither separately offered by 

the Specified Cooperative nor separately 

bargained for with customers (that is, a 

customer cannot purchase the 

agricultural or horticultural products 

without the delivery or distribution 

service). 

(3) A qualified operating manual, that 

is, a manual of instructions that is 

provided in connection with the lease, 

rental, license, sale, exchange, or other 

disposition of the agricultural or 

horticultural products if, in the normal 

course of the Specified Cooperative’s 

business— 

(i) The price for the manual is not 

separately stated from the amount 

charged for the lease, rental, license, 

sale, exchange, or other disposition of 

the agricultural or horticultural 

products; 

(ii) The manual is neither separately 

offered by the Specified Cooperative nor 

separately bargained for with customers 

(that is, a customer cannot purchase the 

agricultural or horticultural products 

without the manual); and 

(iii) The manual is not provided in 

connection with a training course for 

customers. 

(4) A qualified installation, that is, an 

installation service for agricultural or 

horticultural products that is provided 

in connection with the lease, rental, 

license, sale, exchange, or other 

disposition of the agricultural or 

horticultural products if, in the normal 

course of the Specified Cooperative’s 

business— 

(i) The price for the installation 

service is not separately stated from the 

amount charged for the lease, rental, 

license, sale, exchange, or other 

disposition of the agricultural or 

horticultural products; and 

(ii) The installation is neither 

separately offered by the Specified 

Cooperative nor separately bargained for 

with customers (that is, a customer 

cannot purchase the agricultural or 

horticultural products without the 

installation service). 

(5) A de minimis amount of gross 

receipts from embedded services and 

non-qualified property for each item of 

agricultural or horticultural products 

may qualify. For purposes of this 

exception, a de minimis amount of gross 

receipts from embedded services and 

non-qualified property is less than 5 

percent of the total gross receipts 

derived from the lease, rental, license, 

sale, exchange, or other disposition of 

each item of agricultural or horticultural 

products. In the case of gross receipts 

derived from the lease, rental, license, 

sale, exchange, or other disposition of 

agricultural or horticultural products 

that are received over a period of time 

(for example, a multi-year lease or 

installment sale), this de minimis 

exception is applied by taking into 

account the total gross receipts for the 

entire period derived (and to be derived) 

from the lease, rental, license, sale, 

exchange, or other disposition of the 

item of agricultural or horticultural 

products. For purposes of the preceding 

sentence, if a Specified Cooperative 

treats gross receipts as DPGR under this 

de minimis exception, then the 

Specified Cooperative must treat the 

gross receipts recognized in each taxable 

year consistently as DPGR. The gross 

receipts that the Specified Cooperative 

treats as DPGR under paragraphs 

(j)(3)(i)(B)(1) through (4) of this section 

are treated as DPGR for purposes of 

applying this de minimis exception. 

This de minimis exception does not 

apply if the price of a service or nonqualified property is separately stated 

by the Specified Cooperative, or if the 

service or non-qualified property is 

separately offered or separately 

bargained for with the customer (that is, 

the customer can purchase the 

agricultural or horticultural products 

without the service or non-qualified 

property). 

(ii) Non-DPGR. Applicable gross 

receipts as provided in §§ 1.199A–8(b) 

and/or (c) derived from the lease, rental, 

license, sale, exchange or other 

disposition of an item of agricultural or 

horticultural products may be treated as 

non-DPGR if less than 5 percent of the 

Specified Cooperative’s total gross 

receipts derived from the lease, rental, 

license, sale, exchange or other 

disposition of that item are DPGR 

(taking into account embedded services 

and non-qualified property included in 

such disposition, but not part of the 

item). In the case of gross receipts 

derived from the lease, rental, license, 

sale, exchange, or other disposition of 

agricultural or horticultural products 

that are received over a period of time 

(for example, a multi-year lease or 

installment sale), this paragraph (j)(5)(ii) 

is applied by taking into account the 

total gross receipts for the entire period 

derived (and to be derived) from the 

lease, rental, license, sale, exchange, or 

other disposition of the item of 

agricultural or horticultural products. 

For purposes of the preceding sentence, 

if the Specified Cooperative treats gross 

receipts as non-DPGR under this de 

minimis exception, then the Specified 

Cooperative must treat the gross receipts 

recognized in each taxable year 

consistently as non-DPGR. 

(k) Applicability date. The provisions 

of this section apply to taxable years 

beginning after January 19, 2021. 

Taxpayers, however, may choose to 

apply the rules of §§ 1.199A–7 through 

1.199A–12 for taxable years beginning 

on or before that date, provided the 


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taxpayers apply the rules in their 

entirety and in a consistent manner. 

§ 1.199A–10 Allocation of cost of goods 

sold (COGS) and other deductions to 

domestic production gross receipts 

(DPGR), and other rules. 

(a) In general. The provisions of this 

section apply solely for purposes of 

section 199A(g) of the Internal Revenue 

Code (Code). The provisions of this 

section provide additional guidance on 

determining qualified production 

activities income (QPAI) as described 

and defined in § 1.199A–8(b)(4)(ii). 

(b) COGS allocable to DPGR—(1) In 

general. When determining its QPAI, 

the Specified Cooperative (defined in 

§ 1.199A–8(a)(2)) must subtract from its 

DPGR (defined in § 1.199A–8(b)(3)(ii)) 

the COGS allocable to its DPGR. The 

Specified Cooperative determines its 

COGS allocable to DPGR in accordance 

with this paragraph (b)(1) or, if 

applicable, paragraph (f) of this section. 

In the case of a sale, exchange, or other 

disposition of inventory, COGS is equal 

to beginning inventory of the Specified 

Cooperative plus purchases and 

production costs incurred during the 

taxable year and included in inventory 

costs by the Specified Cooperative, less 

ending inventory of the Specified 

Cooperative. In determining its QPAI, 

the Specified Cooperative does not 

include in COGS any payment made, 

whether during the taxable year, or 

included in beginning inventory, for 

which a deduction is allowed under 

section 1382(b) and/or (c), as applicable. 

See § 1.199A–8(b)(4)(ii)(C). COGS is 

determined under the methods of 

accounting that the Specified 

Cooperative uses to compute taxable 

income. See sections 263A, 471, and 

472. If section 263A requires the 

Specified Cooperative to include 

additional section 263A costs (as 

defined in § 1.263A–1(d)(3)) in 

inventory, additional section 263A costs 

must be included in determining COGS. 

COGS also include the Specified 

Cooperative’s inventory valuation 

adjustments such as write-downs under 

the lower of cost or market method. In 

the case of a sale, exchange, or other 

disposition (including, for example, 

theft, casualty, or abandonment) by the 

Specified Cooperative of non-inventory 

property, COGS for purposes of this 

section includes the adjusted basis of 

the property. 

(2) Allocating COGS—(i) In general. A 

Specified Cooperative must use a 

reasonable method based on all the facts 

and circumstances to allocate COGS 

between DPGR and non-DPGR. Whether 

an allocation method is reasonable is 

based on all the facts and 

circumstances, including whether the 

Specified Cooperative uses the most 

accurate information available; the 

relationship between COGS and the 

method used; the accuracy of the 

method chosen as compared with other 

possible methods; whether the method 

is used by the Specified Cooperative for 

internal management or other business 

purposes; whether the method is used 

for other Federal or state income tax 

purposes; the availability of costing 

information; the time, burden, and cost 

of using alternative methods; and 

whether the Specified Cooperative 

applies the method consistently from 

year to year. Depending on the facts and 

circumstances, reasonable methods may 

include methods based on gross receipts 

(defined in § 1.199A–8(b)(2)(iii)), 

number of units sold, number of units 

produced, or total production costs. 

Ordinarily, if a Specified Cooperative 

uses a method to allocate gross receipts 

between DPGR and non-DPGR, then the 

use of a different method to allocate 

COGS that is not demonstrably more 

accurate than the method used to 

allocate gross receipts will not be 

considered reasonable. However, if a 

Specified Cooperative has information 

readily available to specifically identify 

COGS allocable to DPGR and can 

specifically identify that amount 

without undue burden or expense, 

COGS allocable to DPGR is that amount 

irrespective of whether the Specified 

Cooperative uses another allocation 

method to allocate gross receipts 

between DPGR and non-DPGR. A 

Specified Cooperative that does not 

have information readily available to 

specifically identify COGS allocable to 

DPGR and that cannot, without undue 

burden or expense, specifically identify 

that amount is not required to use a 

method that specifically identifies 

COGS allocable to DPGR. The chosen 

reasonable method must be consistently 

applied from one taxable year to another 

and must clearly reflect the portion of 

COGS between DPGR and non-DPGR. 

The method must also be reasonable 

based on all the facts and 

circumstances. The books and records 

maintained for COGS must be consistent 

with any allocations under this 

paragraph (b)(2). 

(ii) Gross receipts recognized in an 

earlier taxable year. If the Specified 

Cooperative (other than a Specified 

Cooperative that uses the small business 

simplified overall method of paragraph 

(f) of this section) recognizes and reports 

gross receipts on a Federal income tax 

return for a taxable year, and incurs 

COGS related to such gross receipts in 

a subsequent taxable year, then 

regardless of whether the gross receipts 

ultimately qualify as DPGR, the 

Specified Cooperative must allocate the 

COGS to— 

(A) DPGR if the Specified Cooperative 

identified the related gross receipts as 

DPGR in the prior taxable year; or 

(B) Non-DPGR if the Specified 

Cooperative identified the related gross 

receipts as non-DPGR in the prior 

taxable year or if the Specified 

Cooperative recognized under the 

Specified Cooperative’s methods of 

accounting those gross receipts in a 

taxable year to which section 199A(g) 

does not apply. 

(iii) COGS associated with activities 

undertaken in an earlier taxable year— 

(A) In general. A Specified Cooperative 

must allocate its COGS between DPGR 

and non-DPGR under the rules provided 

in paragraphs (b)(2)(i) and (iii) of this 

section, regardless of whether certain 

costs included in its COGS can be 

associated with activities undertaken in 

an earlier taxable year (including a year 

prior to the effective date of section 

199A(g)). A Specified Cooperative may 

not segregate its COGS into component 

costs and allocate those component 

costs between DPGR and non-DPGR. 

(B) Example. The following example 

illustrates an application of paragraph 

(b)(2)(iii)(A) of this section. 

(1) Example 1. During the 2020 

taxable year, nonexempt Specified 

Cooperative X grew and sold 

Horticultural Product A. All of the 

patronage gross receipts from sales 

recognized by X in 2020 were from the 

sale of Horticultural Product A and 

qualified as DPGR. Employee 1 of X was 

involved in X’s production process until 

he retired in 2013. In 2020, X paid $30 

directly from its general assets for 

Employee 1’s medical expenses 

pursuant to an unfunded, self-insured 

plan for retired X employees. For 

purposes of computing X’s 2020 taxable 

income, X capitalized those medical 

costs to inventory under section 263A. 

In 2020, the COGS for a unit of 

Horticultural Product A was $100 

(including the applicable portion of the 

$30 paid for Employee 1’s medical costs 

that was allocated to COGS under X’s 

allocation method for additional section 

263A costs). X has information readily 

available to specifically identify COGS 

allocable to DPGR and can identify that 

amount without undue burden and 

expense because all of X’s gross receipts 

from sales in 2020 are attributable to the 

sale of Horticultural Product A and 

qualify as DPGR. The inventory cost of 

each unit of Horticultural Product A 

sold in 2020, including the applicable 

portion of retiree medical costs, is 

related to X’s gross receipts from the 


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sale of Horticultural Product A in 2020. 

X may not segregate the 2020 COGS by 

separately allocating the retiree medical 

costs, which are components of COGS, 

to DPGR and non-DPGR. Thus, even 

though the retiree medical costs can be 

associated with activities undertaken in 

prior years, $100 of inventory cost of 

each unit of Horticultural Product A 

sold in 2020, including the applicable 

portion of the retiree medical expense 

cost component, is allocable to DPGR in 

2020. 

(3) Special allocation rules. Section 

199A(g)(3)(C) provides the following 

two special rules— 

(i) For purposes of determining the 

COGS that are allocable to DPGR, any 

item or service brought into the United 

States (defined in § 1.199A–9(i)) is 

treated as acquired by purchase, and its 

cost is treated as not less than its value 

immediately after it entered the United 

States. A similar rule applies in 

determining the adjusted basis of leased 

or rented property where the lease or 

rental gives rise to DPGR. 

(ii) In the case of any property 

described in paragraph (b)(3)(i) of this 

section that has been exported by the 

Specified Cooperative for further 

manufacture, the increase in cost or 

adjusted basis under paragraph (b)(3)(i) 

of this section cannot exceed the 

difference between the value of the 

property when exported and the value 

of the property when brought back into 

the United States after the further 

manufacture. For the purposes of this 

paragraph (b)(3), the value of property is 

its customs value as defined in section 

1059A(b)(1). 

(4) Rules for inventories valued at 

market or bona fide selling prices. If part 

of COGS is attributable to the Specified 

Cooperative’s inventory valuation 

adjustments, then COGS allocable to 

DPGR includes inventory adjustments to 

agricultural or horticultural products 

that are MPGE in whole or significant 

part within the United States. 

Accordingly, a Specified Cooperative 

that values its inventory under § 1.471– 

4 (inventories at cost or market, 

whichever is lower) or § 1.471–2(c) 

(subnormal goods at bona fide selling 

prices) must allocate a proper share of 

such adjustments (for example, writedowns) to DPGR based on a reasonable 

method based on all the facts and 

circumstances. Factors taken into 

account in determining whether the 

method is reasonable include whether 

the Specified Cooperative uses the most 

accurate information available; the 

relationship between the adjustment 

and the allocation base chosen; the 

accuracy of the method chosen as 

compared with other possible methods; 

whether the method is used by the 

Specified Cooperative for internal 

management or other business purposes; 

whether the method is used for other 

Federal or state income tax purposes; 

the time, burden, and cost of using 

alternative methods; and whether the 

Specified Cooperative applies the 

method consistently from year to year. 

If the Specified Cooperative has 

information readily available to 

specifically identify the proper amount 

of inventory valuation adjustments 

allocable to DPGR, then the Specified 

Cooperative must allocate that amount 

to DPGR. The Specified Cooperative that 

does not have information readily 

available to specifically identify the 

proper amount of its inventory 

valuation adjustments allocable to 

DPGR and that cannot, without undue 

burden or expense, specifically identify 

the proper amount of its inventory 

valuation adjustments allocable to 

DPGR, is not required to use a method 

that specifically identifies inventory 

valuation adjustments to DPGR. The 

chosen reasonable method must be 

consistently applied from one taxable 

year to another and must clearly reflect 

inventory adjustments. The method 

must also be reasonable based on all the 

facts and circumstances. The books and 

records maintained for inventory 

adjustments must be consistent with 

any allocations under this paragraph 

(b)(4). 

(5) Rules applicable to inventories 

accounted for under the last-in, first-out 

inventory method—(i) In general. This 

paragraph (b)(5) applies to inventories 

accounted for using the specific goods 

last-in, first-out (LIFO) method or the 

dollar-value LIFO method. Whenever a 

specific goods grouping or a dollarvalue pool contains agricultural or 

horticultural products that produce 

DPGR and goods that do not, the 

Specified Cooperative must allocate 

COGS attributable to that grouping or 

pool between DPGR and non-DPGR 

using a reasonable method based on all 

the facts and circumstances. Whether a 

method of allocating COGS between 

DPGR and non-DPGR is reasonable must 

be determined in accordance with 

paragraph (b)(2) of this section. In 

addition, this paragraph (b)(5) provides 

methods that a Specified Cooperative 

may use to allocate COGS for a 

Specified Cooperative’s inventories 

accounted for using the LIFO method. If 

the Specified Cooperative uses the 

LIFO/FIFO ratio method provided in 

paragraph (b)(5)(ii) of this section or the 

change in relative base-year cost method 

provided in paragraph (b)(5)(iii) of this 

section, then the Specified Cooperative 

must use that method for all of the 

Specified Cooperative’s inventory 

accounted for under the LIFO method. 

The chosen reasonable method must be 

consistently applied from one taxable 

year to another and must clearly reflect 

the inventory method. The method must 

also be reasonable based on all the facts 

and circumstances. The books and 

records maintained for the inventory 

method must be consistent with any 

allocations under this paragraph (b)(5). 

(ii) LIFO/FIFO ratio method. The 

LIFO/FIFO ratio method is applied with 

respect to the LIFO inventory on a 

grouping-by-grouping or pool-by-pool 

basis. Under the LIFO/FIFO ratio 

method, a Specified Cooperative 

computes the COGS of a grouping or 

pool allocable to DPGR by multiplying 

the COGS of agricultural or horticultural 

products (defined in § 1.199A–8(a)(4)) 

in the grouping or pool that produced 

DPGR computed using the FIFO method 

by the LIFO/FIFO ratio of the grouping 

or pool. The LIFO/FIFO ratio of a 

grouping or pool is equal to the total 

COGS of the grouping or pool computed 

using the LIFO method over the total 

COGS of the grouping or pool computed 

using the FIFO method. 

(iii) Change in relative base-year cost 

method. A Specified Cooperative using 

the dollar-value LIFO method may use 

the change in relative base-year cost 

method. The change in relative baseyear cost method for a Specified 

Cooperative using the dollar-value LIFO 

method is applied to all LIFO inventory 

on a pool-by-pool basis. The change in 

relative base-year cost method 

determines the COGS allocable to DPGR 

by increasing or decreasing the total 

production costs (section 471 costs and 

additional section 263A costs) of 

agricultural or horticultural products 

that generate DPGR by a portion of any 

increment or liquidation of the dollarvalue pool. The portion of an increment 

or liquidation allocable to DPGR is 

determined by multiplying the LIFO 

value of the increment or liquidation 

(expressed as a positive number) by the 

ratio of the change in total base-year 

cost (expressed as a positive number) of 

agricultural or horticultural products 

that will generate DPGR in ending 

inventory to the change in total baseyear cost (expressed as a positive 

number) of all goods in ending 

inventory. The portion of an increment 

or liquidation allocable to DPGR may be 

zero but cannot exceed the amount of 

the increment or liquidation. Thus, a 

ratio in excess of 1.0 must be treated as 

1.0. 

(6) Specified Cooperative using a 

simplified method for additional section 

263A costs to ending inventory. A 


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Specified Cooperative that uses a 

simplified method specifically 

described in the section 263A 

regulations to allocate additional section 

263A costs to ending inventory must 

follow the rules in paragraph (b)(2) of 

this section to determine the amount of 

additional section 263A costs allocable 

to DPGR. Allocable additional section 

263A costs include additional section 

263A costs included in the Specified 

Cooperative’s beginning inventory as 

well as additional section 263A costs 

incurred during the taxable year by the 

Specified Cooperative. Ordinarily, if the 

Specified Cooperative uses a simplified 

method specifically described in the 

section 263A regulations to allocate its 

additional section 263A costs to its 

ending inventory, the additional section 

263A costs must be allocated in the 

same proportion as section 471 costs are 

allocated. 

(c) Other deductions properly 

allocable to DPGR or gross income 

attributable to DPGR—(1) In general. In 

determining its QPAI, the Specified 

Cooperative must subtract from its 

DPGR (in addition to the COGS), the 

deductions that are properly allocable 

and apportioned to DPGR. A Specified 

Cooperative generally must allocate and 

apportion these deductions using the 

rules of the section 861 method 

provided in paragraph (d) of this 

section. In lieu of the section 861 

method, an eligible Specified 

Cooperative may apportion these 

deductions using the simplified 

deduction method provided in 

paragraph (e) of this section. Paragraph 

(f) of this section provides a small 

business simplified overall method that 

may be used by a qualifying small 

Specified Cooperative. A Specified 

Cooperative using the simplified 

deduction method or the small business 

simplified overall method must use that 

method for all deductions. A Specified 

Cooperative eligible to use the small 

business simplified overall method may 

choose at any time for any taxable year 

to use the small business simplified 

overall method or the simplified 

deduction method for a taxable year. 

(2) Treatment of net operating losses. 

A deduction under section 172 for a net 

operating loss (NOL) is not allocated or 

apportioned to DPGR or gross income 

attributable to DPGR. 

(3) W–2 wages. Although only W–2 

wages as described in § 1.199A–11 are 

taken into account in computing the W– 

2 wage limitation, all wages paid (or 

incurred in the case of an accrual 

method taxpayer) in the taxable year are 

taken into account in computing QPAI 

for that taxable year. 

(d) Section 861 method. Under the 

section 861 method, the Specified 

Cooperative must allocate and apportion 

its deductions using the allocation and 

apportionment rules provided under the 

section 861 regulations under which 

section 199A(g) is treated as an 

operative section described in § 1.861– 

8(f). Accordingly, the Specified 

Cooperative applies the rules of the 

section 861 regulations to allocate and 

apportion deductions (including, if 

applicable, its distributive share of 

deductions from passthrough entities) to 

gross income attributable to DPGR. If the 

Specified Cooperative applies the 

allocation and apportionment rules of 

the section 861 regulations for section 

199A(g) and another operative section, 

then the Specified Cooperative must use 

the same method of allocation and the 

same principles of apportionment for 

purposes of all operative sections. 

Research and experimental 

expenditures must be allocated and 

apportioned in accordance with 

§ 1.861–17 without taking into account 

the exclusive apportionment rule of 

§ 1.861–17(b). Deductions for charitable 

contributions (as allowed under section 

170 and section 873(b)(2) or 

882(c)(1)(B)) must be ratably 

apportioned between gross income 

attributable to DPGR and gross income 

attributable to non-DPGR based on the 

relative amounts of gross income. 

(e) Simplified deduction method—(1) 

In general. An eligible Specified 

Cooperative (defined in paragraph (e)(2) 

of this section) may use the simplified 

deduction method to apportion business 

deductions between DPGR and nonDPGR. The simplified deduction 

method does not apply to COGS. Under 

the simplified deduction method, the 

business deductions (except the NOL 

deduction) are ratably apportioned 

between DPGR and non-DPGR based on 

relative gross receipts. Accordingly, the 

amount of deductions for the current 

taxable year apportioned to DPGR is 

equal to the proportion of the total 

business deductions for the current 

taxable year that the amount of DPGR 

bears to total gross receipts. 

(2) Eligible Specified Cooperative. For 

purposes of this paragraph (e), an 

eligible Specified Cooperative is— 

(i) A Specified Cooperative that has 

average annual total gross receipts (as 

defined in paragraph (g) of this section) 

of $100,000,000 or less; or 

(ii) A Specified Cooperative that has 

total assets (as defined in paragraph 

(e)(3) of this section) of $10,000,000 or 

less. 

(3) Total assets.—(i) In general. For 

purposes of the simplified deduction 

method, total assets mean the total 

assets the Specified Cooperative has at 

the end of the taxable year. 

(ii) Members of an expanded affiliated 

group. To compute the total assets of an 

expanded affiliated group (EAG) at the 

end of the taxable year, the total assets 

at the end of the taxable year of each 

member of the EAG at the end of the 

taxable year that ends with or within the 

taxable year of the computing member 

(as described in § 1.199A–12(g)) are 

aggregated. 

(4) Members of an expanded affiliated 

group—(i) In general. Whether the 

members of an EAG may use the 

simplified deduction method is 

determined by reference to all the 

members of the EAG. If the average 

annual gross receipts of the EAG are less 

than or equal to $100,000,000 or the 

total assets of the EAG are less than or 

equal to $10,000,000, then each member 

of the EAG may individually determine 

whether to use the simplified deduction 

method, regardless of the cost allocation 

method used by the other members. 

(ii) Exception. Notwithstanding 

paragraph (e)(4)(i) of this section, all 

members of the same consolidated 

group must use the same cost allocation 

method. 

(f) Small business simplified overall 

method—(1) In general. A qualifying 

small Specified Cooperative may use the 

small business simplified overall 

method to apportion COGS and 

deductions between DPGR and nonDPGR. Under the small business 

simplified overall method, a Specified 

Cooperative’s total costs for the current 

taxable year (as defined in paragraph 

(f)(3) of this section) are apportioned 

between DPGR and non-DPGR based on 

relative gross receipts. Accordingly, the 

amount of total costs for the current 

taxable year apportioned to DPGR is 

equal to the proportion of total costs for 

the current taxable year that the amount 

of DPGR bears to total gross receipts. 

(2) Qualifying small Specified 

Cooperative. For purposes of this 

paragraph (f), a qualifying small 

Specified Cooperative is a Specified 

Cooperative that has average annual 

total gross receipts (as defined in 

paragraph (g) of this section) of 

$25,000,000 or less. 

(3) Total costs for the current taxable 

year. For purposes of the small business 

simplified overall method, total costs for 

the current taxable year means the total 

COGS and deductions for the current 

taxable year. Total costs for the current 

taxable year are determined under the 

methods of accounting that the 

Specified Cooperative uses to compute 

taxable income. 

(4) Members of an expanded affiliated 

group—(i) In general. Whether the 


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members of an EAG may use the small 

business simplified overall method is 

determined by reference to all the 

members of the EAG. If the average 

annual gross receipts of the EAG are less 

than or equal to $25,000,000 then each 

member of the EAG may individually 

determine whether to use the small 

business simplified overall method, 

regardless of the cost allocation method 

used by the other members. 

(ii) Exception. Notwithstanding 

paragraph (f)(4)(i) of this section, all 

members of the same consolidated 

group must use the same cost allocation 

method. 

(g) Average annual gross receipts—(1) 

In general. For purposes of the 

simplified deduction method and the 

small business simplified overall 

method, average annual gross receipts 

means the average annual gross receipts 

of the Specified Cooperative for the 3 

taxable years (or, if fewer, the taxable 

years during which the taxpayer was in 

existence) preceding the current taxable 

year, even if one or more of such taxable 

years began before the effective date of 

section 199A(g). In the case of any 

taxable year of less than 12 months (a 

short taxable year), the gross receipts of 

the Specified Cooperative are 

annualized by multiplying the gross 

receipts for the short period by 12 and 

dividing the result by the number of 

months in the short period. 

(2) Members of an expanded affiliated 

group—(i) In general. To compute the 

average annual gross receipts of an EAG, 

the gross receipts for the entire taxable 

year of each member that is a member 

of the EAG at the end of its taxable year 

that ends with or within the taxable year 

are aggregated. For purposes of this 

paragraph (g)(2), a consolidated group is 

treated as one member of an EAG. 

(ii) Exception. Notwithstanding 

paragraph (g)(1)(i) of this section, all 

members of the same consolidated 

group must use the same cost allocation 

method. 

(h) Cost allocation methods for 

determining oil-related QPAI—(1) 

Section 861 method. A Specified 

Cooperative that uses the section 861 

method to determine deductions that 

are allocated and apportioned to gross 

income attributable to DPGR must use 

the section 861 method to determine 

deductions that are allocated and 

apportioned to gross income attributable 

to oil-related DPGR. 

(2) Simplified deduction method. A 

Specified Cooperative that uses the 

simplified deduction method to 

apportion deductions between DPGR 

and non-DPGR must determine the 

portion of deductions allocable to oilrelated DPGR by multiplying the 

deductions allocable to DPGR by the 

ratio of oil-related DPGR to DPGR from 

all activities. 

(3) Small business simplified overall 

method. A Specified Cooperative that 

uses the small business simplified 

overall method to apportion total costs 

(COGS and deductions) between DPGR 

and non-DPGR must determine the 

portion of total costs allocable to oilrelated DPGR by multiplying the total 

costs allocable to DPGR by the ratio of 

oil-related DPGR to DPGR from all 

activities. 

(i) Applicability date. The provisions 

of this section apply to taxable years 

beginning after January 19, 2021. 

Taxpayers, however, may choose to 

apply the rules of §§ 1.199A–7 through 

1.199A–12 for taxable years beginning 

on or before that date, provided the 

taxpayers apply the rules in their 

entirety and in a consistent manner. 

§ 1.199A–11 Wage limitation for the 

section 199A(g) deduction. 

(a) Rules of application—(1) In 

general. The provisions of this section 

apply solely for purposes of section 

199A(g) of the Internal Revenue Code 

(Code). The provisions of this section 

provide guidance on determining the 

W–2 wage limitation as defined in 

§ 1.199A–8(b)(5)(ii)(B). Except as 

provided in paragraph (d)(2) of this 

section, the Form W–2, Wage and Tax 

Statement, or any subsequent form or 

document used in determining the 

amount of W–2 wages, are those issued 

for the calendar year ending during the 

taxable year of the Specified 

Cooperative (defined in § 1.199A– 

8(a)(2)) for wages paid to employees (or 

former employees) of the Specified 

Cooperative for employment by the 

Specified Cooperative. Employees are 

limited to employees defined in section 

3121(d)(1) and (2) (that is, officers of a 

corporate taxpayer and employees of the 

taxpayer under the common law rules). 

See paragraph (a)(5) of this section for 

the requirement that W–2 wages must 

have been included in a return filed 

with the Social Security Administration 

(SSA) within 60 days after the due date 

(including extensions) of the return. See 

also section 199A(a)(4)(C). 

(2) Wage limitation for section 

199A(g) deduction. The amount of the 

deduction allowable under section 

199A(g) to the Specified Cooperative for 

any taxable year cannot exceed 50 

percent of the W–2 wages (as defined in 

section 199A(g)(1)(B)(ii) and paragraph 

(b) of this section) for the taxable year 

that are attributable to domestic 

production gross receipts (DPGR), 

defined in § 1.199A–8(b)(3)(ii), of 

agricultural or horticultural products 

defined in § 1.199A–8(a)(4). 

(3) Wages paid by entity other than 

common law employer. In determining 

W–2 wages, the Specified Cooperative 

may take into account any W–2 wages 

paid by another entity and reported by 

the other entity on Forms W–2 with the 

other entity as the employer listed in 

Box c of the Forms W–2, provided that 

the W–2 wages were paid to common 

law employees or officers of the 

Specified Cooperative for employment 

by the Specified Cooperative. In such 

cases, the entity paying the W–2 wages 

and reporting the W–2 wages on Forms 

W–2 is precluded from taking into 

account such wages for purposes of 

determining W–2 wages with respect to 

that entity. For purposes of this 

paragraph (a)(4), entities that pay and 

report W–2 wages on behalf of or with 

respect to other taxpayers can include, 

but are not limited to, certified 

professional employer organizations 

under section 7705, statutory employers 

under section 3401(d)(1), and agents 

under section 3504. 

(4) Requirement that wages must be 

reported on return filed with the Social 

Security Administration—(i) In general. 

Pursuant to section 199A(g)(1)(B)(ii) and 

section 199A(b)(4)(C), the term W–2 

wages does not include any amount that 

is not properly included in a return filed 

with SSA on or before the 60th day after 

the due date (including extensions) for 

such return. Under § 31.6051–2 of this 

chapter, each Form W–2 and the 

transmittal Form W–3, Transmittal of 

Wage and Tax Statements, together 

constitute an information return to be 

filed with SSA. Similarly, each Form 

W–2c, Corrected Wage and Tax 

Statement, and the transmittal Form W– 

3 or W–3c, Transmittal of Corrected 

Wage and Tax Statements, together 

constitute an information return to be 

filed with SSA. In determining whether 

any amount has been properly included 

in a return filed with SSA on or before 

the 60th day after the due date 

(including extensions) for such return, 

each Form W–2 together with its 

accompanying Form W–3 is considered 

a separate information return and each 

Form W–2c together with its 

accompanying Form W–3 or Form W–3c 

is considered a separate information 

return. Section 6071(c) provides that 

Forms W–2 and W–3 must be filed on 

or before January 31 of the year 

following the calendar year to which 

such returns relate (but see the special 

rule in § 31.6071(a)–1T(a)(3)(1) of this 

chapter for monthly returns filed under 

§ 31.6011(a)–5(a) of this chapter). 

Corrected Forms W–2 are required to be 

filed with SSA on or before January 31 


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of the year following the year in which 

the correction is made. 

(ii) Corrected return filed to correct a 

return that was filed within 60 days of 

the due date. If a corrected information 

return (Return B) is filed with SSA on 

or before the 60th day after the due date 

(including extensions) of Return B to 

correct an information return (Return A) 

that was filed with SSA on or before the 

60th day after the due date (including 

extensions) of the information return 

(Return A) and paragraph (a)(5)(iii) of 

this section does not apply, then the 

wage information on Return B must be 

included in determining W–2 wages. If 

a corrected information return (Return 

D) is filed with SSA later than the 60th 

day after the due date (including 

extensions) of Return D to correct an 

information return (Return C) that was 

filed with SSA on or before the 60th day 

after the due date (including extensions) 

of the information return (Return C), 

then if Return D reports an increase (or 

increases) in wages included in 

determining W–2 wages from the wage 

amounts reported on Return C, such 

increase (or increases) on Return D is 

disregarded in determining W–2 wages 

(and only the wage amounts on Return 

C may be included in determining W– 

2 wages). If Return D reports a decrease 

(or decreases) in wages included in 

determining W–2 wages from the 

amounts reported on Return C, then, in 

determining W–2 wages, the wages 

reported on Return C must be reduced 

by the decrease (or decreases) reflected 

on Return D. 

(iii) Corrected return filed to correct a 

return that was filed later than 60 days 

after the due date. If an information 

return (Return F) is filed to correct an 

information return (Return E) that was 

not filed with SSA on or before the 60th 

day after the due date (including 

extensions) of Return E, then Return F 

(and any subsequent information 

returns filed with respect to Return E) 

will not be considered filed on or before 

the 60th day after the due date 

(including extensions) of Return F (or 

the subsequent corrected information 

return). Thus, if a Form W–2c is filed to 

correct a Form W–2 that was not filed 

with SSA on or before the 60th day after 

the due date (including extensions) of 

the Form W–2 (or to correct a Form W– 

2c relating to a Form W–2 that had not 

been filed with SSA on or before the 

60th day after the due date (including 

extensions) of the Form W–2), then this 

Form W–2c is not to be considered to 

have been filed with SSA on or before 

the 60th day after the due date 

(including extensions) for this Form W– 

2c, regardless of when the Form W–2c 

is filed. 

(b) Definition of W–2 wages—(1) In 

general. Section 199A(g)(1)(B)(ii) 

provides that the W–2 wages of the 

Specified Cooperative must be 

determined in the same manner as 

under section 199A(b)(4) (without 

regard to section 199A(b)(4)(B) and after 

application of section 199A(b)(5)). 

Section 199A(b)(4)(A) provides that the 

term W–2 wages means with respect to 

any person for any taxable year of such 

person, the amounts described in 

paragraphs (3) and (8) of section 6051(a) 

paid by such person with respect to 

employment of employees by such 

person during the calendar year ending 

during such taxable year. Thus, the term 

W–2 wages includes the total amount of 

wages as defined in section 3401(a); the 

total amount of elective deferrals 

(within the meaning of section 

402(g)(3)); the compensation deferred 

under section 457; and the amount of 

designated Roth contributions (as 

defined in section 402A). 

(2) Section 199A(g) deduction. 

Pursuant to section 199A(g)(3)(A), W–2 

wages do not include any amount which 

is not properly allocable to DPGR for 

purposes of calculating qualified 

production activities income (QPAI) as 

defined in § 1.199A–8(b)(4)(ii). The 

Specified Cooperative may determine 

the amount of wages that is properly 

allocable to DPGR using a reasonable 

method based on all the facts and 

circumstances. The chosen reasonable 

method must be consistently applied 

from one taxable year to another and 

must clearly reflect the wages allocable 

to DPGR for purposes of QPAI. The 

books and records maintained for wages 

allocable to DPGR for purposes of QPAI 

must be consistent with any allocations 

under this paragraph (b)(2). 

(c) Methods for calculating W–2 

wages. The Secretary may provide for 

methods that may be used in calculating 

W–2 wages, including W–2 wages for 

short taxable years by publication in the 

Internal Revenue Bulletin (see 

§ 601.601(d)(2)(ii)(b) of this chapter). 

(d) Wage limitation—acquisitions, 

dispositions, and short taxable years— 

(1) In general. For purposes of 

computing the deduction under section 

199A(g) of the Specified Cooperative, in 

the case of an acquisition or disposition 

(as defined in section 199A(b)(5) and 

paragraph (d)(3) of this section) that 

causes more than one Specified 

Cooperative to be an employer of the 

employees of the acquired or disposed 

of Specified Cooperative during the 

calendar year, the W–2 wages of the 

Specified Cooperative for the calendar 

year of the acquisition or disposition are 

allocated between or among each 

Specified Cooperative based on the 

period during which the employees of 

the acquired or disposed of Specified 

Cooperatives were employed by the 

Specified Cooperative, regardless of 

which permissible method is used for 

reporting predecessor and successor 

wages on Form W–2, Wage and Tax 

Statement. 

(2) Short taxable year that does not 

include December 31. If the Specified 

Cooperative has a short taxable year that 

does not contain a calendar year ending 

during such short taxable year, wages 

paid to employees for employment by 

the Specified Cooperative during the 

short taxable year are treated as W–2 

wages for such short taxable year for 

purposes of paragraph (a) of this section 

(if the wages would otherwise meet the 

requirements to be W–2 wages under 

this section but for the requirement that 

a calendar year must end during the 

short taxable year). 

(3) Acquisition or disposition. For 

purposes of paragraph (d)(1) and (2) of 

this section, the terms acquisition and 

disposition include an incorporation, a 

liquidation, a reorganization, or a 

purchase or sale of assets. 

(e) Application in the case of a 

Specified Cooperative with a short 

taxable year. In the case of a Specified 

Cooperative with a short taxable year, 

subject to the rules of paragraph (a) of 

this section, the W–2 wages of the 

Specified Cooperative for the short 

taxable year can include only those 

wages paid during the short taxable year 

to employees of the Specified 

Cooperative, only those elective 

deferrals (within the meaning of section 

402(g)(3)) made during the short taxable 

year by employees of the Specified 

Cooperative, and only compensation 

actually deferred under section 457 

during the short taxable year with 

respect to employees of the Specified 

Cooperative. 

(f) Non-duplication rule. Amounts 

that are treated as W–2 wages for a 

taxable year under any method cannot 

be treated as W–2 wages of any other 

taxable year. Also, an amount cannot be 

treated as W–2 wages by more than one 

taxpayer. Finally, an amount cannot be 

treated as W–2 wages by the Specified 

Cooperative both in determining 

patronage and nonpatronage W–2 

wages. 

(g) Wage expense safe harbor—(1) In 

general. A Specified Cooperative using 

either the section 861 method of cost 

allocation under § 1.199A–10(d) or the 

simplified deduction method under 

§ 1.199A–10(e) may determine the 

amount of W–2 wages that are properly 

allocable to DPGR for a taxable year by 

multiplying the amount of W–2 wages 

determined under paragraph (b)(1) of 


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this section for the taxable year by the 

ratio of the Specified Cooperative’s 

wage expense included in calculating 

QPAI for the taxable year to the 

Specified Cooperative’s total wage 

expense used in calculating the 

Specified Cooperative’s taxable income 

for the taxable year, without regard to 

any wage expense disallowed by section 

465, 469, 704(d), or 1366(d). A Specified 

Cooperative that uses either the section 

861 method of cost allocation or the 

simplified deduction method to 

determine QPAI must use the same 

expense allocation and apportionment 

methods that it uses to determine QPAI 

to allocate and apportion wage expense 

for purposes of this safe harbor. For 

purposes of this paragraph (g)(1), the 

term wage expense means wages (that 

is, compensation paid by the employer 

in the active conduct of a trade or 

business to its employees) that are 

properly taken into account under the 

Specified Cooperative’s method of 

accounting. 

(2) Wage expense included in cost of 

goods sold. For purposes of paragraph 

(g)(1) of this section, a Specified 

Cooperative may determine its wage 

expense included in cost of goods sold 

(COGS) using a reasonable method 

based on all the facts and 

circumstances, such as using the 

amount of direct labor included in 

COGS or using section 263A labor costs 

(as defined in § 1.263A–1(h)(4)(ii)) 

included in COGS. The chosen 

reasonable method must be consistently 

applied from one taxable year to another 

and must clearly reflect the portion of 

wage expense included in COGS. The 

method must also be reasonable based 

on all the facts and circumstances. The 

books and records maintained for wage 

expense included in COGS must be 

consistent with any allocations under 

this paragraph (g)(2). 

(3) Small business simplified overall 

method safe harbor. The Specified 

Cooperative that uses the small business 

simplified overall method under 

§ 1.199A–10(f) may use the small 

business simplified overall method safe 

harbor for determining the amount of 

W–2 wages determined under paragraph 

(b)(1) of this section that is properly 

allocable to DPGR. Under this safe 

harbor, the amount of W–2 wages 

determined under paragraph (b)(1) of 

this section that is properly allocable to 

DPGR is equal to the same proportion of 

W–2 wages determined under paragraph 

(b)(1) of this section that the amount of 

DPGR bears to the Specified 

Cooperative’s total gross receipts. 

(h) Applicability date. The provisions 

of this section apply to taxable years 

beginning after January 19, 2021. 

Taxpayers, however, may choose to 

apply the rules of §§ 1.199A–7 through 

1.199A–12 for taxable years beginning 

on or before that date, provided the 

taxpayers apply the rules in their 

entirety and in a consistent manner. 

§ 1.199A–12 Expanded affiliated groups. 

(a) In general. The provisions of this 

section apply solely for purposes of 

section 199A(g) of the Internal Revenue 

Code (Code). Except as otherwise 

provided in the Code or regulations 

issued under the relevant section of the 

Code (for example, sections 

199A(g)(3)(D)(ii) and 267, § 1.199A–8(c), 

paragraph (a)(3) of this section, and the 

consolidated return regulations under 

section 1502), each nonexempt 

Specified Cooperative (defined in 

§ 1.199A–8(a)(2)(ii)) that is a member of 

an expanded affiliated group (EAG) 

(defined in paragraph (a)(1) of this 

section) computes its own taxable 

income or loss, qualified production 

activities income (QPAI) (defined in 

§ 1.199A–8(b)(4)(ii)), and W–2 wages 

(defined in § 1.199A–11(b)). For 

purposes of this section unless 

otherwise specified, the term Specified 

Cooperative means a nonexempt 

Specified Cooperative. If a Specified 

Cooperative is also a member of a 

consolidated group, see paragraph (d) of 

this section. 

(1) Definition of an expanded 

affiliated group. An EAG is an affiliated 

group as defined in section 1504(a), 

determined by substituting ‘‘more than 

50 percent’’ for ‘‘at least 80 percent’’ in 

each place it appears and without regard 

to section 1504(b)(2) and (4). 

(2) Identification of members of an 

expanded affiliated group—(i) In 

general. Each Specified Cooperative 

must determine if it is a member of an 

EAG on a daily basis. 

(ii) Becoming or ceasing to be a 

member of an expanded affiliated 

group. If a Specified Cooperative 

becomes or ceases to be a member of an 

EAG, the Specified Cooperative is 

treated as becoming or ceasing to be a 

member of the EAG at the end of the day 

on which its status as a member 

changes. 

(3) Attribution of activities—(i) In 

general. Except as provided in 

paragraph (a)(3)(iv) of this section, if a 

Specified Cooperative that is a member 

of an EAG (disposing member) derives 

gross receipts (defined in § 1.199A– 

8(b)(2)(iii)) from the lease, rental, 

license, sale, exchange, or other 

disposition (defined in § 1.199A–9(j)) of 

agricultural or horticultural products 

(defined in § 1.199A–8(a)(4)) that were 

manufactured, produced, grown or 

extracted (MPGE) (defined in § 1.199A– 

9(f)), in whole or significant part 

(defined in § 1.199A–9(h)), in the 

United States (defined in § 1.199A–9(i)) 

by another Specified Cooperative, then 

the disposing member is treated as 

conducting the previous activities 

conducted by such other Specified 

Cooperative with respect to the 

agricultural or horticultural products in 

determining whether its gross receipts 

are domestic production gross receipts 

(DPGR) (defined in § 1.199A–8(b)(3)(ii)) 

if— 

(A) Such property was MPGE by such 

other Specified Cooperative, and 

(B) The disposing member is a 

member of the same EAG as such other 

Specified Cooperative at the time that 

the disposing member disposes of the 

agricultural or horticultural products. 

(ii) Date of disposition for leases, 

rentals, or licenses. Except as provided 

in paragraph (a)(3)(iv) of this section, 

with respect to a lease, rental, or license, 

the disposing member described in 

paragraph (a)(3)(i) of this section is 

treated as having disposed of the 

agricultural or horticultural products on 

the date or dates on which it takes into 

account the gross receipts derived from 

the lease, rental, or license under its 

methods of accounting. 

(iii) Date of disposition for sales, 

exchanges, or other dispositions. Except 

as provided in paragraph (a)(3)(iv) of 

this section, with respect to a sale, 

exchange, or other disposition, the 

disposing member is treated as having 

disposed of the agricultural or 

horticultural products on the date on 

which it ceases to own the agricultural 

or horticultural products for Federal 

income tax purposes, even if no gain or 

loss is taken into account. 

(iv) Exception. A Specified 

Cooperative is not attributed 

nonpatronage activities conducted by 

another Specified Cooperative. See 

§ 1.199A–8(b)(2)(ii). 

(4) Marketing Specified Cooperatives. 

A Specified Cooperative is treated as 

having MPGE in whole or significant 

part any agricultural or horticultural 

product within the United States 

marketed by the Specified Cooperative 

which its patrons have so MPGE. 

Patrons are defined in § 1.1388–1(e). 

(5) Anti-avoidance rule. If a 

transaction between members of an EAG 

is engaged in or structured with a 

principal purpose of qualifying for, or 

increasing the amount of, the section 

199A(g) deduction of the EAG or the 

portion of the section 199A(g) deduction 

allocated to one or more members of the 

EAG, the Secretary may make 

adjustments to eliminate the effect of 

the transaction on the computation of 

the section 199A(g) deduction. 


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(b) Computation of EAG’s section 

199A(g) deduction.—(1) In general. The 

section 199A(g) deduction for an EAG is 

determined by separately computing the 

section 199A(g) deduction from the 

patronage sources of Specified 

Cooperatives that are members of the 

EAG. The section 199A(g) deduction 

from patronage sources of Specified 

Cooperatives is determined by 

aggregating the income or loss, QPAI, 

and W–2 wages, if any, of each 

patronage source of a Specified 

Cooperative that is a member of the 

EAG. For purposes of this 

determination, a member’s QPAI may be 

positive or negative. A Specified 

Cooperative’s taxable income or loss 

and QPAI is determined by reference to 

the Specified Cooperative’s method of 

accounting. For purposes of determining 

the section 199A(g) deduction for an 

EAG, taxable income or loss, QPAI, and 

W–2 wages of a Specified Cooperative 

from nonpatronage sources are 

considered to be zero, other than as 

allowed under § 1.199A–8(b)(2)(ii). 

(2) Example. The following example 

illustrates the application of paragraph 

(b)(1) of this section. 

(i) Facts. Nonexempt Specified 

Cooperatives X, Y, and Z, calendar year 

taxpayers, are the only members of an 

EAG and are not members of a 

consolidated group. X has patronage 

source taxable income of $50,000, QPAI 

of $15,000, and W–2 wages of $0. Y has 

patronage source taxable income of 

($20,000), QPAI of ($1,000), and W–2 

wages of $750. Z has patronage source 

taxable income of $0, QPAI of $0, and 

W–2 wages of $3,000. 

(ii) Analysis. In determining the 

EAG’s section 199A(g) deduction, the 

EAG aggregates each member’s 

patronage source taxable income or loss, 

QPAI, and W–2 wages. Thus, the EAG 

has patronage source taxable income of 

$30,000, the sum of X’s patronage 

source taxable income of $50,000, Y’s 

patronage source taxable income of 

($20,000), and Z’s patronage source 

taxable income of $0. The EAG has 

QPAI of $14,000, the sum of X’s QPAI 

of $15,000, Y’s QPAI of ($1,000), and Z’s 

QPAI of $0. The EAG has W–2 wages of 

$3,750, the sum of X’s W–2 wages of $0, 

Y’s W–2 wages of $750, and Z’s W–2 

wages of $3,000. Accordingly, the EAG’s 

section 199A(g) deduction equals 

$1,260, 9% of $14,000, the lesser of the 

QPAI and patronage source taxable 

income, but not greater than $1,875, 

50% of its W–2 wages of $3,750. This 

result would be the same if X had a 

nonpatronage source income or loss, 

because nonpatronage source income of 

a nonexempt Specified Cooperative is 

not taken into account in determining 

the section 199A(g) deduction. 

(3) Net operating loss carryovers/ 

carrybacks. In determining the taxable 

income of an EAG, if a Specified 

Cooperative has a net operating loss 

(NOL) from its patronage sources that 

may be carried over or carried back (in 

accordance with section 172) to the 

taxable year, then for purposes of 

determining the taxable income of the 

Specified Cooperative, the amount of 

the NOL used to offset taxable income 

cannot exceed the taxable income of the 

patronage source of that Specified 

Cooperative. 

(4) Losses used to reduce taxable 

income of an expanded affiliated group. 

The amount of an NOL sustained by a 

Specified Cooperative member of an 

EAG that is used in the year sustained 

in determining an EAG’s taxable income 

limitation under § 1.199A–8(b)(5)(ii)(C) 

is not treated as an NOL carryover to 

any taxable year in determining the 

taxable income limitation under 

§ 1.199A–8(b)(5)(ii)(C). For purposes of 

this paragraph (b)(4), an NOL is 

considered to be used if it reduces an 

EAG’s aggregate taxable income from 

patronage sources or nonpatronage 

sources, as the case may be, regardless 

of whether the use of the NOL actually 

reduces the amount of the section 

199A(g) deduction that the EAG would 

otherwise derive. An NOL is not 

considered to be used to the extent that 

it reduces an EAG’s aggregate taxable 

income from patronage sources to an 

amount less than zero. If more than one 

Specified Cooperative has an NOL used 

in the same taxable year to reduce the 

EAG’s taxable income from patronage 

sources, the respective NOLs are 

deemed used in proportion to the 

amount of each Specified Cooperative’s 

NOL. 

(5) Example. The following example 

illustrates the application of paragraph 

(b)(4) of this section. 

(i) Facts. Nonexempt Specified 

Cooperatives A and B are the only two 

members of an EAG. A and B are both 

calendar year taxpayers and they do not 

join in the filing of a consolidated 

Federal income tax return. Neither A 

nor B had taxable income or loss prior 

to 2020. In 2020, A has patronage QPAI 

and patronage taxable income of $1,000 

and B has patronage QPAI of $1,000 and 

a patronage NOL of $1,500. A also has 

nonpatronage income of $3,000. B has 

no activities other than from its 

patronage activities. In 2021, A has 

patronage QPAI of $2,000 and patronage 

taxable income of $1,000 and B has 

patronage QPAI of $2,000 and patronage 

taxable income prior to the NOL 

deduction allowed under section 172 of 

$2,000. Neither A nor B has 

nonpatronage activities in 2021. A’s and 

B’s patronage activities have aggregate 

W–2 wages in excess of the section 

199A(g)(1)(B) wage limitation in both 

2020 and 2021. 

(ii) Section 199A(g) deduction for 

2020. In determining the EAG’s section 

199A(g) deduction for 2020, A’s $1,000 

of QPAI and B’s $1,000 of QPAI are 

aggregated, as are A’s $1,000 of taxable 

income from its patronage activities and 

B’s $1,500 NOL from its patronage 

activities. A’s nonpatronage income is 

not included. Thus, for 2020, the EAG 

has patronage QPAI of $2,000 and 

patronage taxable income of ($500). The 

EAG’s section 199A(g) deduction for 

2020 is 9% of the lesser of its patronage 

QPAI or its patronage taxable income. 

Because the EAG has a taxable loss from 

patronage sources in 2020, the EAG’s 

section 199A(g) deduction is $0. 

(iii) Section 199A(a) deduction for 

2021. In determining the EAG’s section 

199A deduction for 2021, A’s patronage 

QPAI of $2,000 and B’s patronage QPAI 

of $2,000 are aggregated, resulting in the 

EAG having patronage QPAI of $4,000. 

Also, $1,000 of B’s patronage NOL from 

2020 was used in 2020 to reduce the 

EAG’s taxable income from patronage 

sources to $0. The remaining $500 of B’s 

patronage NOL from 2020 is not 

considered to have been used in 2020 

because it reduced the EAG’s patronage 

taxable income to less than $0. 

Accordingly, for purposes of 

determining the EAG’s taxable income 

limitation under § 1.199A–8(b)(5) in 

2021, B is deemed to have only a $500 

NOL carryover from its patronage 

sources from 2020 to offset a portion of 

its 2021 taxable income from its 

patronage sources. Thus, B’s taxable 

income from its patronage sources in 

2021 is $1,500, which is aggregated with 

A’s $1,000 of taxable income from its 

patronage sources. The EAG’s taxable 

income limitation in 2021 is $2,500. The 

EAG’s section 199A(g) deduction is 9% 

of the lesser of its patronage sourced 

QPAI of $4,000 and its taxable income 

from patronage sources of $2,500. Thus, 

the EAG’s section 199A(g) deduction in 

2021 is 9% of $2,500, or $225. The 

results for 2021 would be the same if 

neither A nor B had patronage sourced 

QPAI in 2020. 

(c) Allocation of an expanded 

affiliated group’s section 199A(g) 

deduction among members of the 

expanded affiliated group—(1) In 

general. An EAG’s section 199A(g) 

deduction from its patronage sources, as 

determined in paragraph (b) of this 

section, is allocated among the 

Specified Cooperatives that are 

members of the EAG in proportion to 


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each Specified Cooperative’s patronage 

QPAI, regardless of whether the 

Specified Cooperative has patronage 

taxable income or W–2 wages for the 

taxable year. For these purposes, if a 

Specified Cooperative has negative 

patronage QPAI, such QPAI is treated as 

zero. Pursuant to § 1.199A–8(b)(6), a 

patronage section 199A(g) deduction 

can be applied only against patronage 

income and deductions. 

(2) Use of section 199A(g) deduction 

to create or increase a net operating 

loss. If a Specified Cooperative that is a 

member of an EAG has some or all of 

the EAG’s section 199A(g) deduction 

allocated to it under paragraph (c)(1) of 

this section and the amount allocated 

exceeds patronage taxable income, 

determined as described in this section 

and prior to allocation of the section 

199A(g) deduction, the section 199A(g) 

deduction will create an NOL for the 

patronage source. Similarly, if a 

Specified Cooperative that is a member 

of an EAG, prior to the allocation of 

some or all of the EAG’s section 199A(g) 

deduction to the member, has a 

patronage NOL for the taxable year, the 

portion of the EAG’s section 199A(g) 

deduction allocated to the member will 

increase such NOL. 

(d) Special rules for members of the 

same consolidated group—(1) 

Intercompany transactions. In the case 

of an intercompany transaction between 

consolidated group members S and B (as 

the terms intercompany transaction, S, 

and B are defined in § 1.1502–13(b)(1)), 

S takes the intercompany transaction 

into account in computing the section 

199A(g) deduction at the same time and 

in the same proportion as S takes into 

account the income, gain, deduction, or 

loss from the intercompany transaction 

under § 1.1502–13. 

(2) Application of the simplified 

deduction method and the small 

business simplified overall method. For 

purposes of applying the simplified 

deduction method under § 1.199A–10(e) 

and the small business simplified 

overall method under § 1.199A–10(f), a 

Specified Cooperative that is part of a 

consolidated group determines its QPAI 

using its members’ DPGR, non-DPGR, 

cost of goods sold (COGS), and all other 

deductions, expenses, or losses 

(hereinafter deductions), determined 

after the application of § 1.1502–13. 

(3) Determining the section 199A(g) 

deduction—(i) Expanded affiliated 

group consists of consolidated group 

and non-consolidated group members. 

In determining the section 199A(g) 

deduction, if an EAG includes Specified 

Cooperatives that are members of the 

same consolidated group and Specified 

Cooperatives that are not members of 

the same consolidated group, the 

consolidated taxable income or loss, 

QPAI, and W–2 wages, from patronage 

sources, if any, of the consolidated 

group (and not the separate taxable 

income or loss, QPAI, and W–2 wages 

from patronage sources of the members 

of the consolidated group), are 

aggregated with the taxable income or 

loss, QPAI, and W–2 wages, from 

patronage sources, if any, of the nonconsolidated group members. For 

example, if A, B, C, S1, and S2 are 

Specified Cooperatives that are 

members of the same EAG, and A, S1, 

and S2 are members of the same 

consolidated group (the A consolidated 

group), then the A consolidated group is 

treated as one member of the EAG. 

Accordingly, the EAG is considered to 

have three members—the A 

consolidated group, B, and C. The 

consolidated taxable income or loss, 

QPAI, and W–2 wages from patronage 

sources, if any, of the A consolidated 

group are aggregated with the taxable 

income or loss from patronage sources, 

QPAI, and W–2 wages, if any, of B and 

C in determining the EAG’s section 

199A(g) deduction from patronage 

sources. Pursuant to § 1.199A–8(b)(6), a 

patronage section 199A(g) deduction 

can be applied only against patronage 

income and deductions. 

(ii) Expanded affiliated group consists 

only of members of a single 

consolidated group. If all of the 

Specified Cooperatives that are 

members of an EAG are also members of 

the same consolidated group, the 

consolidated group’s section 199A(g) 

deduction is determined using the 

consolidated group’s consolidated 

taxable income or loss, QPAI, and W– 

2 wages, from patronage sources rather 

than the separate taxable income or loss, 

QPAI, and W–2 wages from patronage 

sources of its members. 

(4) Allocation of the section 199A(g) 

deduction of a consolidated group 

among its members. The section 

199A(g) deduction from patronage 

sources of a consolidated group (or the 

section 199A(g) deduction allocated to a 

consolidated group that is a member of 

an EAG) is allocated among the 

patronage sources of Specified 

Cooperatives in proportion to each 

Specified Cooperative’s patronage QPAI, 

regardless of whether the Specified 

Cooperative has patronage separate 

taxable income or W–2 wages for the 

taxable year. In allocating the section 

199A(g) deduction of a patronage source 

of a Specified Cooperative that is part of 

a consolidated group among patronage 

sources of other members of the same 

group, any redetermination of a 

member’s patronage receipts, COGS, or 

other deductions from an intercompany 

transaction under § 1.1502–13(c)(1)(i) or 

(c)(4) is not taken into account for 

purposes of section 199A(g). Also, for 

purposes of this allocation, if a 

patronage source of a Specified 

Cooperative that is a member of a 

consolidated group has negative QPAI, 

the QPAI of the patronage source is 

treated as zero. 

(e) Examples. The following examples 

illustrate the application of paragraphs 

(a) through (d) of this section. 

(i) Example 1. Specified Cooperatives 

X, Y, and Z are members of the same 

EAG but are not members of a 

consolidated group. X, Y, and Z each 

files Federal income tax returns on a 

calendar year basis. None of X, Y, or Z 

have activities other than from its 

patronage sources. Prior to 2020, X had 

no taxable income or loss. In 2020, X 

has taxable income of $0, QPAI of 

$2,000, and W–2 wages of $0, Y has 

taxable income of $4,000, QPAI of 

$3,000, and W–2 wages of $500, and Z 

has taxable income of $4,000, QPAI of 

$5,000, and W–2 wages of $2,500. 

Accordingly, the EAG’s patronage 

source taxable income is $8,000, the 

sum of X’s taxable income of $0, Y’s 

taxable income of $4,000, and Z’s 

taxable income of $4,000. The EAG has 

QPAI of $10,000, the sum of X’s QPAI 

of $2,000, Y’s QPAI of $3,000, and Z’s 

QPAI of $5,000. The EAG’s W–2 wages 

are $3,000, the sum of X’s W–2 wages 

of $0, Y’s W–2 wages of $500, and Z’s 

W–2 wages of $2,500. Thus, the EAG’s 

section 199A(g) deduction for 2020 is 

$720 (9% of the lesser of the EAG’s 

patronage source taxable income of 

$8,000 and the EAG’s QPAI of $10,000, 

but no greater than 50% of its W–2 

wages of $3,000, that is $1,500). 

Pursuant to paragraph (c)(1) of this 

section, the $720 section 199A(g) 

deduction is allocated to X, Y, and Z in 

proportion to their respective amounts 

of QPAI, that is $144 to X ($720 × 

$2,000/$10,000), $216 to Y ($720 × 

$3,000/$10,000), and $360 to Z ($720 × 

$5,000/$10,000). Although X’s 

patronage source taxable income for 

2020 determined prior to allocation of a 

portion of the EAG’s section 199A(g) 

deduction to it was $0, pursuant to 

paragraph (c)(2) of this section, X will 

have an NOL from its patronage source 

for 2020 equal to $144, which will be a 

carryover to 2021. 

(ii) Example 2. (A) Facts. Corporation 

X is the common parent of a 

consolidated group, consisting of X and 

Y, which has filed a consolidated 

Federal income tax return for many 

years. Corporation P is the common 

parent of a consolidated group, 

consisting of P and S, which has filed 


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a consolidated Federal income tax 

return for many years. The X and P 

consolidated groups each file their 

consolidated Federal income tax returns 

on a calendar year basis. X, Y, P, and S 

are each Specified Cooperatives, and 

none of X, Y, P, or S has ever had 

activities other than from its patronage 

sources. The X consolidated group and 

the P consolidated group are members 

of the same EAG in 2021. In 2020, the 

X consolidated group incurred a 

consolidated net operating loss (CNOL) 

of $25,000. Neither P nor S (nor the P 

consolidated group) has ever incurred 

an NOL. In 2021, the X consolidated 

group has (prior to the deduction under 

section 172) taxable income of $8,000 

and the P consolidated group has 

taxable income of $20,000. X’s QPAI is 

$8,000, Y’s QPAI is ($13,000), P’s QPAI 

is $16,000 and S’s QPAI is $4,000. There 

are sufficient W–2 wages to exceed the 

section 199A(g)(1)(B) limitation. 

(B) Analysis. The X consolidated 

group uses $8,000 of its CNOL from 

2020 to offset the X consolidated 

group’s taxable income in 2021. None of 

the X consolidated group’s remaining 

CNOL may be used to offset taxable 

income of the P consolidated group 

under paragraph (b)(3) of this section. 

Accordingly, for purposes of 

determining the EAG’s section 199A(g) 

deduction for 2021, the EAG has taxable 

income of $20,000 (the X consolidated 

group’s taxable income, after the 

deduction under section 172, of $0 plus 

the P consolidated group’s taxable 

income of $20,000). The EAG has QPAI 

of $15,000 (the X consolidated group’s 

QPAI of ($5,000) (X’s $8,000 + Y’s 

($13,000)), and the P consolidated 

group’s QPAI of $20,000 (P’s $16,000 + 

S’s $4,000)). The EAG’s section 199A(g) 

deduction equals $1,350, 9% of the 

lesser of its taxable income of $20,000 

and its QPAI of $15,000. The section 

199A(g) deduction is allocated between 

the X and P consolidated groups in 

proportion to their respective QPAI. 

Because the X consolidated group has 

negative QPAI, all of the section 199A(g) 

deduction of $1,350 is allocated to the 

P consolidated group. This $1,350 is 

allocated between P and S, the members 

of the P consolidated group, in 

proportion to their QPAI. Accordingly, 

P is allocated $1,080 ($1,350 × ($16,000/ 

$20,000) and S is allocated $270 ($1,350 

× $4,000/$20,000)). 

(f) Allocation of patronage income 

and loss by a Specified Cooperative that 

is a member of the expanded affiliated 

group for only a portion of the year—(1) 

In general. A Specified Cooperative that 

becomes or ceases to be a member of an 

EAG during its taxable year must 

allocate its taxable income or loss, 

QPAI, and W–2 wages between the 

portion of the taxable year that the 

Specified Cooperative is a member of 

the EAG and the portion of the taxable 

year that the Specified Cooperative is 

not a member of the EAG. This 

allocation of items is made by using the 

pro rata allocation method described in 

this paragraph (f)(1). Under the pro rata 

allocation method, an equal portion of 

patronage taxable income or loss, QPAI, 

and W–2 wages is assigned to each day 

of the Specified Cooperative’s taxable 

year. Those items assigned to those days 

that the Specified Cooperative was a 

member of the EAG are then aggregated. 

(2) Coordination with rules relating to 

the allocation of income under 

§ 1.1502–76(b). If § 1.1502–76(b) 

(relating to items included in a 

consolidated return) applies to a 

Specified Cooperative that is a member 

of an EAG, then any allocation of items 

required under this paragraph (f) is 

made only after the allocation of the 

items pursuant to § 1.1502–76(b). 

(g) Total section 199A(g) deduction 

for a Specified Cooperative that is a 

member of an expanded affiliated group 

for some or all of its taxable year—(1) 

Member of the same EAG for the entire 

taxable year. If a Specified Cooperative 

is a member of the same EAG for its 

entire taxable year, the Specified 

Cooperative’s section 199A(g) deduction 

for the taxable year is the amount of the 

section 199A(g) deduction allocated to it 

by the EAG under paragraph (c)(1) of 

this section. 

(2) Member of the expanded affiliated 

group for a portion of the taxable year. 

If a Specified Cooperative is a member 

of an EAG for only a portion of its 

taxable year and is either not a member 

of any EAG or is a member of another 

EAG, or both, for another portion of the 

taxable year, the Specified Cooperative’s 

section 199A(g) deduction for the 

taxable year is the sum of its section 

199A(g) deductions for each portion of 

the taxable year. 

(3) Example. The following example 

illustrates the application of paragraphs 

(f) and (g) of this section. 

(i) Facts. Specified Cooperatives X 

and Y, calendar year taxpayers, are 

members of the same EAG for the entire 

2020 taxable year. Specified Cooperative 

Z, also a calendar year taxpayer, is a 

member of the EAG of which X and Y 

are members for the first half of 2020 

and not a member of any EAG for the 

second half of 2020. None of X, Y, or Z 

have activities other than from its 

patronage sources. Assume that X, Y, 

and Z each has W–2 wages in excess of 

the section 199A(g)(1)(B) wage 

limitation for all relevant periods. In 

2020, X has taxable income of $2,000 

and QPAI of $600, Y has taxable loss of 

$400 and QPAI of ($200), and Z has 

taxable income of $1,400 and QPAI of 

$2,400. 

(ii) Analysis. Pursuant to the pro rata 

allocation method, $700 of Z’s 2020 

taxable income and $1,200 of its QPAI 

are allocated to the first half of the 2020 

taxable year (the period in which Z is 

a member of the EAG) and $700 of Z’s 

2020 taxable income and $1,200 of its 

QPAI are allocated to the second half of 

the 2020 taxable year (the period in 

which Z is not a member of any EAG). 

Accordingly, in 2020, the EAG has 

taxable income from patronage sources 

of $2,300 ($2,000 + ($400) + $700) and 

QPAI of $1,600 ($600 + ($200) + 

$1,200). The EAG’s section 199A(g) 

deduction for 2020 is $144 (9% of the 

lesser of the EAG’s taxable income of 

$2,300 or QPAI of $1,600). Pursuant to 

§ 1.199A–12(c)(1), this $144 deduction 

is allocated to X, Y, and Z in proportion 

to their respective QPAI. Accordingly, X 

is allocated $48 of the EAG’s section 

199A(g) deduction ($144 × ($600/($600 

+ $0 + $1,200))), Y is allocated $0 of the 

EAG’s section 199A(g) deduction ($144 

× ($0/($600 + $0 + $1,200))), and Z is 

allocated $96 of the EAG’s section 

199A(g) deduction ($144 × ($1,200/ 

($600 + $0 + $1,200))). For the second 

half of 2020, Z has taxable income of 

$700 and QPAI of $1,200. Therefore, for 

the second half of 2020, Z has a section 

199A(g) deduction of $63 (9% of the 

lesser of its taxable income of $700 or 

its QPAI of $1,200). Accordingly, X’s 

2020 section 199A(g) deduction is $48 

and Y’s 2020 section 199A(g) deduction 

is $0. Z’s 2020 section 199A(g) 

deduction is $159, the sum of $96, the 

portion of the EAG’s section 199A(g) 

deduction allocated to Z for the first half 

of 2020 and Z’s $63 section 199A(g) 

deduction for the second half of 2020. 

(h) Computation of section 199A(g) 

deduction for members of an expanded 

affiliated group with different taxable 

years—(1) In general. If Specified 

Cooperatives that are members of an 

EAG have different taxable years, in 

determining the section 199A(g) 

deduction of a member (the computing 

member), the computing member is 

required to take into account the taxable 

income or loss, determined without 

regard to the section 199A(g) deduction, 

QPAI, and W–2 wages of each other 

group member that are both— 

(i) Attributable to the period that each 

other member of the EAG and the 

computing member are members of the 

EAG; and 

(ii) Taken into account in a taxable 

year that begins after the effective date 

of section 199A(g) and ends with or 

within the taxable year of the computing 


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member with respect to which the 

section 199A(g) deduction is computed. 

(2) Example. The following example 

illustrates the application of this 

paragraph (h). 

(i) Facts. Specified Cooperatives X, Y, 

and Z are members of the same EAG. 

Neither X, Y, nor Z is a member of a 

consolidated group. X and Y are 

calendar year taxpayers and Z is a June 

30 fiscal year taxpayer. Z came into 

existence on July 1, 2020. None of X, Y, 

or Z have activities other than from its 

patronage sources. Each Specified 

Cooperative has taxable income that 

exceeds its QPAI and W–2 wages in 

excess of the section 199A(g)(1)(B) wage 

limitation. For the taxable year ending 

December 31, 2020, X’s QPAI is $8,000 

and Y’s QPAI is ($6,000). For its taxable 

year ending June 30, 2021, Z’s QPAI is 

$2,000. 

(ii) 2020 Computation. In computing 

X’s and Y’s respective section 199A(g) 

deductions for their taxable years 

ending December 31, 2020, X’s taxable 

income or loss, QPAI and W–2 wages 

and Y’s taxable income or loss, QPAI, 

and W–2 wages from their respective 

taxable years ending December 31, 2020, 

are aggregated. The EAG’s QPAI for this 

purpose is $2,000 (X’s QPAI of $8,000 

+ Y’s QPAI of ($6,000)). Accordingly, 

the EAG’s section 199A(g) deduction is 

$180 (9% × $2,000). The $180 deduction 

is allocated to each of X and Y in 

proportion to their respective QPAI as a 

percentage of the QPAI of each member 

of the EAG that was taken into account 

in computing the EAG’s section 199A(g) 

deduction. Pursuant to paragraph (c)(1) 

of this section, in allocating the section 

199A(g) deduction between X and Y, 

because Y’s QPAI is negative, Y’s QPAI 

is treated as being $0. Accordingly, X’s 

section 199A(g) deduction for its taxable 

year ending December 31, 2020, is $180 

($180 × $8,000/($8,000 + $0)). Y’s 

section 199A(g) deduction for its taxable 

year ending December 31, 2020, is $0 

($180 × $0/($8,000 + $0)). 

(iii) 2021 Computation. In computing 

Z’s section 199A(g) deduction for its 

taxable year ending June 30, 2021, X’s 

and Y’s items from their respective 

taxable years ending December 31, 2020, 

are taken into account. Therefore, X’s 

taxable income or loss and Y’s taxable 

income or loss, determined without 

regard to the section 199A(g) deduction, 

QPAI, and W–2 wages from their taxable 

years ending December 31, 2020, are 

aggregated with Z’s taxable income or 

loss, QPAI, and W–2 wages from its 

taxable year ending June 30, 2021. The 

EAG’s QPAI is $4,000 (X’s QPAI of 

$8,000 + Y’s QPAI of ($6,000) + Z’s 

QPAI of $2,000). The EAG’s section 

199A(g) deduction is $360 (9% × 

$4,000). A portion of the $360 

deduction is allocated to Z in 

proportion to its QPAI as a percentage 

of the QPAI of each member of the EAG 

that was taken into account in 

computing the EAG’s section 199A(g) 

deduction. Pursuant to paragraph (c)(1) 

of this section, in allocating a portion of 

the $360 deduction to Z, Y’s QPAI is 

treated as being $0 because Y’s QPAI is 

negative. Z’s section 199A(g) deduction 

for its taxable year ending June 30, 2021, 

is $72 ($360 × ($2,000/($8,000 + $0 + 

$2,000))). 

(i) Partnership owned by expanded 

affiliated group—(1) In general. For 

purposes of section 199A(g)(3)(D) 

relating to DPGR, if all of the interests 

in the capital and profits of a 

partnership are owned by members of a 

single EAG at all times during the 

taxable year of such partnership (EAG 

partnership), then the EAG partnership 

and all members of that EAG are treated 

as a single taxpayer during such period. 

(2) Attribution of activities—(i) In 

general. If a Specified Cooperative 

which is a member of an EAG 

(disposing member) derives gross 

receipts from the lease, rental, license, 

sale, exchange, or other disposition of 

property that was MPGE by an EAG 

partnership, all the partners of which 

are members of the same EAG to which 

the disposing member belongs at the 

time that the disposing member 

disposes of such property, then the 

disposing member is treated as 

conducting the MPGE activities 

previously conducted by the EAG 

partnership with respect to that 

property. The previous sentence applies 

only for those taxable years in which the 

disposing member is a member of the 

EAG of which all the partners of the 

EAG partnership are members for the 

entire taxable year of the EAG 

partnership. With respect to a lease, 

rental, or license, the disposing member 

is treated as having disposed of the 

property on the date or dates on which 

it takes into account its gross receipts 

from the lease, rental, or license under 

its method of accounting. With respect 

to a sale, exchange, or other disposition, 

the disposing member is treated as 

having disposed of the property on the 

date it ceases to own the property for 

Federal income tax purposes, even if no 

gain or loss is taken into account. 

Likewise, if an EAG partnership derives 

gross receipts from the lease, rental, 

license, sale, exchange, or other 

disposition of property that was MPGE 

by a member (or members) of the same 

EAG (the producing member) to which 

all the partners of the EAG partnership 

belong at the time that the EAG 

partnership disposes of such property, 

then the EAG partnership is treated as 

conducting the MPGE activities 

previously conducted by the producing 

member with respect to that property. 

The previous sentence applies only for 

those taxable years in which the 

producing member is a member of the 

EAG of which all the partners of the 

EAG partnership are members for the 

entire taxable year of the EAG 

partnership. With respect to a lease, 

rental, or license, the EAG partnership 

is treated as having disposed of the 

property on the date or dates on which 

it takes into account its gross receipts 

derived from the lease, rental, or license 

under its method of accounting. With 

respect to a sale, exchange, or other 

disposition, the EAG partnership is 

treated as having disposed of the 

property on the date it ceases to own the 

property for Federal income tax 

purposes, even if no gain or loss is taken 

into account. 

(ii) Attribution between expanded 

affiliated group partnerships. If an EAG 

partnership (disposing partnership) 

derives gross receipts from the lease, 

rental, license, sale, exchange, or other 

disposition of property that was MPGE 

by another EAG partnership (producing 

partnership), then the disposing 

partnership is treated as conducting the 

MPGE activities previously conducted 

by the producing partnership with 

respect to that property, provided that 

each of these partnerships (the 

producing partnership and the 

disposing partnership) is owned for its 

entire taxable year in which the 

disposing partnership disposes of such 

property by members of the same EAG. 

With respect to a lease, rental, or 

license, the disposing partnership is 

treated as having disposed of the 

property on the date or dates on which 

it takes into account its gross receipts 

from the lease, rental, or license under 

its method of accounting. With respect 

to a sale, exchange, or other disposition, 

the disposing partnership is treated as 

having disposed of the property on the 

date it ceases to own the property for 

Federal income tax purposes, even if no 

gain or loss is taken into account. 

(j) Applicability date. The provisions 

of this section apply to taxable years 

beginning after January 19, 2021. 

Taxpayers, however, may choose to 

apply the rules of §§ 1.199A–7 through 

1.199A–12 for taxable years beginning 

on or before that date, provided the 

taxpayers apply the rules in their 

entirety and in a consistent manner. 

■ Par. 5. Section 1.1382–3 is amended 

by 

■ 1. Revising paragraph (c)(2). 

■ 2. Adding paragraph (e). 


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Federal Register / Vol. 86, No. 11 / Tuesday, January 19, 2021 / Rules and Regulations 5593 

The revisions and additions read as 

follows: 

§ 1.1382–3 Taxable income of 

cooperatives; special deductions for 

exempt farmers’ cooperatives. 

* * * * * 

(c) * * * 

(2) Definition. The term income 

derived from sources other than 

patronage used in this paragraph (c) 

means income from nonpatronage 

sources within the meaning of § 1.1388– 

1(f)(3). 

* * * * * 

(e) Applicability date. Paragraph (c)(2) 

of this section applies to taxable years 

beginning after January 19, 2021. For 

taxable years beginning on or before 

January 19, 2021, taxpayers, however, 

may choose to apply the rules of 

paragraph (c)(2) of this section, 

provided the taxpayers apply the rules 

in their entirety and in a consistent 

manner. 

■ Par. 6. Section 1.1388–1 is amended 

by adding paragraphs (f) and (g). 

The additions read as follows: 

§ 1.1388–1 Definitions and special rules. 

* * * * * 

(f) Patronage and nonpatronage 

sourced items—(1) Directly related use 

test. Whether an item of income or 

deduction is patronage or nonpatronage 

sourced is determined by applying the 

directly related use test. 

(2) Patronage sourced income or 

deductions. If the income or deduction 

is produced by a transaction that 

actually facilitates the accomplishment 

of the cooperative’s marketing, 

purchasing, or services activities, the 

income or deduction is from patronage 

sources. 

(3) Nonpatronage sourced income or 

deductions. If the transaction producing 

the income or deduction does not 

actually facilitate the accomplishment 

of the cooperative’s marketing, 

purchasing, or services activities but 

merely enhances the overall profitability 

of the cooperative, being merely 

incidental to the association’s 

cooperative operation, the income or 

deduction is from nonpatronage 

sources. 

(g) Applicability date. Paragraph (f) of 

this section applies to taxable years 

beginning after January 19, 2021. 

Taxpayers, however, may choose to 

apply the rules of paragraph (f) of this 

section for taxable years beginning on or 

before that date, provided the taxpayers 

apply the rules in their entirety and in 

a consistent manner. 

Sunita Lough, 

Deputy Commissioner for Services and 

Enforcement. 

Approved: January 8, 2021. 

David J. Kautter, 

Assistant Secretary of the Treasury (Tax 

Policy). 

[FR Doc. 2021–00667 Filed 1–14–21; 8:45 am] 

BILLING CODE 4830–01–P 


khammond on DSKJM1Z7X2PROD with RULES5