Members Take Advantage of the Domestic Production Activity Deduction

Everyday is an excellent time to make sure you are maximizing profit and taking advantage of all potential deductions available. One deduction available to farmers which MKC can pass through to its’ members is the Domestic Production Activities Deduction (DPAD). Grain farmers can use this deduction to reduce the total income tax they must pay to the federal government.

According to tax professional Jim Graber, the DPAD has saved his clients well over $100,000 in the 2014 tax season with his average client saving approximately $1,000 through the deduction. Graber sees both sides of this deduction as he is also a producer near Newton.

One concern Graber has is some producers and tax preparers don’t understand how the per-unit retains is to be reported. Graber says if done correctly the per-unit retains is reported on the dividend line along with the dividend and then subtracted from the grain sales line. “The DPAD is then placed on the form 8903 and added to other DPAD the farm may produce,” he says. “If someone says the per-unit retains and the DPAD is increasing taxes, something isn’t being done right.” Graber comments besides lowering the tax, the DPAD can also result in increased earned income credit, retirement savers credit, less of social security taxed, and many other benefits that result when Adjusted Gross Income is lowered. 

Graber encourages all MKC members to take advantage of this opportunity to maximize their deductions. “A benefit of doing business with MKC compared to other businesses is sharing in the profits through patronage refunds and also sharing in the DPAD deduction the co-op has been able to pass back to its patrons,” Graber says. 

Graber encourages all producers to do the math when deciding where they choose to haul their grain. “This deduction also has a significant positive financial impact on the local communities and MKC members,” he says.

How is the DPAD calculated?

According to TMA Controller Tricia Jantz, the tax benefit is a separate calculation from patronage and is available to co-op members who delivered and sold grain through the co-op.

The following is a sample scenario showing the impact DPAD would make on an individual’s taxable income.

A farmer sold 20,000 bushels of grain that was delivered to an MKC facility for the twelve months ending on February 28. At year end, MKC declared a patronage rate of 20 cents per bushel and a domestic production activities deduction of 15 cents per bushel. Assuming this producer was a member of MKC, the producer would receive $4,000 through patronage and a $3,000 Domestic Production Activities Deduction.

MKC includes the amount of DPAD deduction on the 1099 PATR mailed in January. The 1099 PATR includes the amount of patronage dividend the co-op distributes as well as the amount of DPAD that is passed back to the patrons.

Section 199 Review

In the summer 2013, MKC announced they would be passing this significant tax deduction to producer members through DPAD. Often referred to as the Section 199 Tax Deduction, DPAD is a special federal income tax provision allowing a cooperative to allocate to its members a tax deduction generated by “qualified production activities.” As outlined by the Internal Revenue Service and as it relates to the DPAD, grain payments made by the co-op to its members are considered qualified production activities by the cooperative, thus making the co-op and its members eligible for the deduction.

Jantz says producers will automatically be included in the deduction as long they are a member of MKC, have signed a Master Marketing Agreement required by the IRS, sold grain to the co-op and initiated grain settlements either by check or ACH.

“One requirement we get a lot of questions about is the Master Marketing Agreement,” Jantz says. “The agreement is between the member and cooperative that outlines and documents the terms, obligations, warranties and remedies in regards to sales and purchase contracts.  It also acknowledges that grain purchases between the cooperative and member constitute “per unit retain allocations” for the purposes of calculating the Domestic Production Activities Deduction.” Jantz noted a similar Master Marketing Agreement is already included with all TMA grain purchase contracts and is a very quick and easy process that can either be done electronically or as a printed agreement. According to Jantz, 2,178 MKC members participated in the DPAD for tax year 2014.

DPAD for MKC Members
“I am extremely grateful for this tax deduction as a producer and for the amount of money it saves the clients I work with,” Graber says. “I appreciate the work many MKC and TMA employees did to make this deduction possible.”

Although it may seem complicated, the Domestic Production Activities Deduction can prove beneficial in reducing income tax liability from your farming operation. If you still need to meet all of the requirements to take advantage of the tax deduction, please contact Sarah Unruh, MKC staff accountant, at 800-864-4428. 

Please consult your tax adviser for further information on DPAD and how it applies to your individual situation.