Update on the Domestic Production Activities Deduction (DPAD)

IRS has recently provided a private letter ruling to several dairy cooperatives determining that,
under their by-laws, they are able to calculate and pass through the Domestic Production Activities
Deduction in a way that is much more tax favorable to their membership.

The co-ops are now sending letters to members announcing this change. In some cases, this
letter contains information needed for 2008 tax return. You need to retain this information for
tax planning and tax preparation purposes.

The good news is that there is a change in the way the coop reports milk proceeds which allows
the coop to calculate a DPAD. This can than be passed out to its members. In most cases, this
DPAD will be substantially greater than the DPAD the farm producer would have originally calculated on their own return. The flow-through DPAD is being reported on a 2008 form 1099-PATR and is transfered directly onto Form 8903 without any reduction for the coop member’s farm operating expenses or W-2 wage limitation.

Caution will need to be used to make sure that milk proceeds are being reported as patronage income so that there is no double-dipping on the calculation of DPAD on the farm producer’s tax return.

The bad news is that dairy farmers who included their 2007 milk sales to cooperatives in their own 2007 calculation of domestic production gross receipts to arrive at their 2007 DPAD may need to amend their 2007 returns. That is because they should re-compute their QPAI without regard to their milk sales because their cooperative is using those proceeds in their own calculation and passing the deduction on to their members this year.

Source: First Pioneer Farm Credit
https://www.firstpioneer.com/News-and-Events/News/20081203IncomeTaxChanges08.aspx