Domestic Production Activities Deduction (DPAD) – Special rules for cooperatives

Refresher on Section 199

The section 199 deduction, also known as the Domestic Production Activities Deduction (DPAD), was introduced into US tax law as part of the American Jobs Creation Act of 2004. While the deduction itself is not new, the IRS continues to issue rulings that impact the calculation and deduction as it pertains to cooperatives.

Section 199 calculation basics

To figure out the deduction, a cooperative first must calculate its Domestic Productions Gross Receipts (DPGR). Next, the taxpayer must deduct the sum of allocable cost of goods sold and other expenses, losses and deductions which are properly allocable to DPGR to determine its Qualified Production Activity Income (QPAI). For years after 2011, the deduction is equal to the lesser of the following:

  • 9% of QPAI for the taxable year
  • 9% of taxable income for the taxable year
  • 50% of eligible form W-2 wages

For cooperatives, the benefit can be retained or passed through to its members.

Special rules for cooperatives

The tax rules for a cooperative’s DPAD are different and more complicated than the rules that apply to other taxable entities. A cooperative’s taxable income and QPAI are computed without taking into account any deductions for patronage dividends, per-unit retain allocations, and nonpatronage distributions under I.R.C. § 1382(b) and (c). Cooperatives need to determine how to characterize their payments to members for members’ commodities. After reviewing numerous cooperative member agreements, the IRS has issued private letter rulings that conclude that a cooperative’s payment to a member for commodities are advance per unit retains payment in money (PURPIM). The result is cooperatives do not need to deduct these payments from DPGR to arrive at QPAI, which in turn should increase the potential DPAD available to the cooperative and its members.

Recent section 199 developments

There have been numerous IRS private letter rulings published related to DPAD specific to cooperatives since 2008. Most recently in 2012, the IRS released PLR 201219001 which allows certain advance payments (c-checks) from a cooperative to its patrons to be added back for purposes of determining the section 199 deduction. Again, this ruling would generally increase the potential DPAD available to the cooperative. In turn, the c-checks should be capitalized as part of inventory.

Proposed changes to Form 8903

Finally, cooperatives should be aware the Department of Treasury has proposed new instructions to Form 8903 for 2012 which will increase the number of line items to complete and related attachments. The proposed instructions will no doubt increase the length of time to complete the form. Public comments on the proposed instructions were due on or before September 24, 2012.


The fully phased in 9% section 199 deduction can provide a valuable benefit to cooperatives and their members. Cooperatives should revisit their calculations annually to ensure they are properly identifying DPGR and non-DPGR, allocating costs under the appropriate method and applying the correct percentage for determining the potential deduction. Additionally, cooperatives should ensure they maintain proper documentation for their section 199 deduction to comply with IRS guidelines. Section 199 includes many additional provisions beyond the scope of this article. Now is the time to speak with a tax professional that can help you with the complex analyses required to determine the appropriate calculation that will comply with IRS guidelines.