United States

Section 199A deduction and W-2 information return filing requirements

The Section 199A deduction depends on timely filed W-2s

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Section 199A in general

Section 199A provides a deduction to non-corporate taxpayers of up to 20 percent of the taxpayer’s Qualified Business Income (QBI) from each of the taxpayer’s qualified trades or businesses, including those operated through a partnership, S corporation, or sole proprietorship.

For each qualified trade or business, section 199A limits the amount of the section 199A deduction to the lesser of 20 percent of the taxpayer’s QBI with respect to the qualified trade or business, or either a (1) wage limitation or a (2) wage and basis limitation. The wage limit is 50 percent of the W–2 wages with respect to the qualified trade or business, and the wage and basis limitation is the sum of 25 percent of the W–2 wages with respect to the qualified trade or business plus 2.5 percent of the unadjusted basis, determined immediately after acquisition, of all qualified property.

The Form W-2 trap

The above is a simplistic summary of the section 199A deduction. It is vital for taxpayers to remember that for section 199A deduction calculation purposes, timely filed Forms W-2 are critical. The proposed regulations provide that the term W-2 wages does not include any amount that is not properly included with an original or corrected Form W-2 Wage and Tax Statement filed with the Social Security Administration (SSA) within 60 days after the due date (including extensions) for such filing. In general, a taxpayer must file its Forms W-2 and the related Form W-3 transmittal on or before Jan. 31 of the year following the calendar year to which such returns relate. That means a taxpayer will need to file any late or corrected 2018 Forms W-2 by April 1, 2019.

It is important to note that automatic extensions for filing Form W-2 are no longer available. However, one, and only one, 30-day extension may be available by timely filing Form 8809 with the IRS.

See Notice 2018-64 for further information on the determination of W-2 wages, including how to calculate W-2 wages for this purpose, and the section 199A deduction.

 

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