The IRS has recently issued Rev. Proc. 2021-11 – released concurrently with final regulations on the section 199A deduction for cooperatives – that modifies and clarifies prior guidance for determining W-2 wages for section 199A eligible taxpayers with certain short taxable years. This change applies to all taxpayers, not just cooperatives.
Under prior guidance (Rev. Proc. 2019-11) a taxpayer with a short taxable year containing, but not ending on, December 31, would only be allowed to include in their section 199A W-2 wages those wages that were actually or constructively paid during the portion of the short taxable year in the calendar year ending on December 31. For example, if a taxpayer had a short taxable year that began on October 1 of year 1, and ended on June 1 of year 2, the taxpayer could only include in their section 199A W-2 wages those wages actually or constructively paid between October 1 and December 31 of year 1. This could negatively, and inappropriately, impact a taxpayer’s allowable section 199A deduction.
Fortunately, Rev. Proc. 2021-11 modifies the guidance and now provides that a taxpayer with a short taxable year containing, but not ending on, December 31, can include all W-2 wages actually or constructively paid during the entire short taxable year, even if some portion of those amounts are included on W-2s filed in a subsequent calendar year.
Although the population of taxpayers affected by this change is likely small, it is a favorable change to those falling into this unique circumstance.