On August 8,2018, the IRS released proposed regulations on Code Sec. 199A, one of the major tax breaks enacted as part of the Tax Cuts and Jobs Act of 2017. We are composing a synopsis of these qualifications to inform the public of this deduction. Our articles are only a brief summary there are many technical issues related to this law. Please read these articles in light of this limitation.
W-2 Wage Limitation
If a taxpayer’s taxable income exceeds a statutorily-defined amount (threshold amount), Code Sec. 199A may limit the taxpayer’s Code Sec. 199A deduction based on the following:
- the type of trade or business engaged in by the taxpayer;
- the amount of W-2 wages paid with respect to the trade or business (W-2 wages); and/or
- the unadjusted basis immediately after acquisition (UBIA) of qualified property held for use in the trade or business.
The threshold amount, for any tax year beginning in 2018, is $157,500 (or $315,000 in the case of a taxpayer filing a joint return).
If an individual’s taxable income exceeds the threshold amount, the Code Sec. 199A deduction based on the greater of either:
(1) the W-2 wages paid, or
(2) the W-2 wages paid and UBIA of qualified property attributable to a trade or business.
Wages Paid by PEOs and Other Third-Party Payers
One of the main concerns practitioners had in this area was whether amounts paid to workers who receive Forms W-2 from third party payers (such as professional employer organizations (PEOs), that pay these wages to workers on behalf of their clients and report wages on Forms W-2.
In order for wages reported on a Form W-2 to be included in the determination of W-2 wages of a taxpayer, the Form W-2 must be for employment by the taxpayer. In determining W-2 wages, a person may consider any W-2 wages paid by another person and reported by the other person on Forms W-2 with the other person as the employer listed on Forms W-2, provided that the W-2 wages were paid to common law employees or officers of the person for employment by the person.
In such cases, the person paying the W-2 wages and reporting the W-2 is prohibited from considering such wages for purposes of determining W-2 wages with respect to that person. Persons that pay and report W-2 wages on behalf of or with respect to others can include certified professional employer organizations, statutory employers, and agents. Under this rule, persons who otherwise qualify for the deduction under Code Sec. 199A are not limited in applying the deduction merely because they use a third-party payor to pay and report wages to their employees.