For Cooperatives, New Section 199 Regulations Bring Clarity—but Also New Questions

On August 27, the Department of the Treasury and IRS released new proposed (REG-136459-09) and temporary (TD 9731) regulations for Internal Revenue Code (IRC) Section 199, which covers the domestic manufacturing activities deduction. The proposed regulations have a few benefits for cooperatives, but they also add to the confusion regarding per-unit retains paid in money (PURPIMs).


First, the good news: The temporary regulations under IRC Section 1.199-2 (the wage limitation) clearly address companies that have short years without a calendar year-end. This is particularly important for cooperatives involved in mergers and acquisitions and other potential year-end changes. The new rule states that companies that don’t have a calendar year-end ending with or within a short taxable year are to use the wages paid during the short taxable year for purposes of the wage test, which prohibits a company from claiming a deduction in excess of 50 percent of its W-2 wages paid during the calendar year.

The proposed regulations also replace the very difficult-to-interpret “benefits and burdens of ownership” test, which is used to determine which taxpayer can claim the deduction. In its place, the regulations give a much clearer rule that names the party that performs the qualifying activity as the taxpayer that can claim the deduction. For cooperatives, this test usually arises under two different contexts:

  • Co-packing, in which a cooperative packs or bottles products for other companies to better utilize its packing facilities
  • Storage and handling of agricultural products that may still be owned by the patron

The new rules make it clearer that the cooperative is involved in a qualifying activity in these two situations, which is especially important in cases where the cooperative doesn’t have the benefit of using the de minimis rules.


The negative for cooperatives in these proposed regulations comes in the new Example 4, given in IRC 1.199-6(m). The example clearly shows how to calculate qualified production activities income if the payment for the patron’s product is a PURPIM; however, it leaves Example 1—which uses the same facts as Example 4—unchanged, adding to the confusion about what is and what isn’t a PURPIM.

In addition, Example 4 adds that the cooperative should report the payment as a PURPIM on Form 1099-PATR, even though cooperatives aren’t required to report PURPIMs under IRC Section 6044 or the related regulations. This raises the question: Is a PURPIM not a PURPIM if it isn’t reported on a 1099-PATR?

Get Involved

It will be interesting to see the comments that get submitted and how the Treasury and the IRS respond to those comments prior to finalizing these new regulations. If neither you nor your cooperative is a member of the National Society of Accountants for Cooperatives or the National Council of Farmer Cooperatives, consider joining and supporting these organizations’ efforts to make the final regulations as friendly as possible to cooperatives and their farmer members.

For more information on the proposed and temporary regulations regarding Section 199, or for insight on other changes that may impact your cooperative, contact:

Eric Krienert, Tax Director, Cooperatives
(209) 955-6118

Bryan Powell, National Practice Leader, Agribusiness
(509) 834-2455

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