Good News on DPAD

The House Ways and Means Committee released their income tax proposals on Monday September 13.  As part of that guidance was a proposal to limit the Section 199A deduction to $400,000 for single taxpayers and $500,000 for married couples.

Our concern was whether this limit was on the full Section 199A(a) 20% deduction and the Section 199A(g) DPAD deduction that flows through from cooperatives.  We now have gotten further guidance and the good news is that the Section 199A(g) DPAD deduction will continue to remain unlimited.  Only the Section 199A(a) deduction will be limited.

Let’s look at an example:

John is a very successful farmer with several outside business interests.  Net Qualified Business Income is $5,000,000.  His dairy operation also receives a $1 million DPAD from his cooperative.  Under current rules, John could deduct a $1 million Section 199A(a) 20% deduction (assuming no limits based on wages, etc.) plus a $1 million DPAD for a total Section 199A deduction of $2 million.  If the House proposal goes through, then his total Section 199A deduction will be limited to $1.5 million or a reduction of $500,000.

Now, this is only a House proposal.  We already know that Senator Wyden wants to completely eliminate the Section 199A(a) deduction but still retain the DPAD deduction.  If his proposal is final law, then John in our example would only get the $1 million DPAD deduction and lose all $1 million of the Section 199A(a) deduction.

We will keep you posted.