IRS Addresses Calculation of Specified Cooperatives' W-2 Wages Under Sec. 199A

(Parker Tax Publishing February 2021)

The IRS issued a procedure providing methods for specified agricultural or horticultural cooperatives to calculate W-2 wages for purposes of the W-2 wage limitation provided in Code Sec. 199A(g)(1)(B)(i). The procedure also modifies Rev. Proc. 2019-11 to amend the method for determining W-2 wages for taxpayers with short tax years. Rev. Proc. 2021-11.

Background

Under Code Sec. 199A(g)(1)(A), specified agricultural or horticultural cooperatives (specified cooperatives) can deduct an amount equal to the lesser of 9 percent of qualified production activities income (QPAI) or taxable income, but not to exceed the W-2 wage limitation. Under the wage limitation in Code Sec. 199A(g)(1)(B)(i), the amount of the deduction is limited to 50 percent of the W-2 wages of the specified cooperative.

For this purpose, W-2 wages are determined in the same manner as under Code Sec. 199A(b)(4), without regard to Code Sec. 199A(b)(4)(B) (which excludes from the definition amounts not properly allocable to qualified business income for purposes of Code Sec. 199A(c)(1)) and after applying Code Sec. 199A(b)(5) (concerning acquisitions, dispositions, and short tax years), except that such wages do not include any amount which is not properly allocable to domestic production gross receipts (DPGR) for purposes of Code Sec. 199A(g)(3)(A).

The term "W-2 wages" is defined in Code Sec. 199A(b)(4)(A) to mean, with respect to any person for any tax year of such person, the amounts described in Code Sec. 6051(a)(3) and (8) paid by such person with respect to employment of employees by such person during the calendar year ending during such tax year. W-2 wages do not include any amount that is not properly included in a return filed with the Social Security Administration (SSA) on or before the 60th day after the due date (including extensions) for such return. The IRS is authorized to issue guidance providing computational methods that may be used to calculate W-2 wages.

Rev. Proc. 2021-11

Last week, the IRS issued Rev. Proc. 2021-11, which provides three methods for calculating W-2 wages for purposes of Code Sec. 199A(g) and the regulations. The first method (unmodified Box method) allows for a simplified calculation, while the second method (modified Box 1 method) and third method (tracking wages method) provide greater accuracy.

Rev. Proc. 2021-11 provides rules for calculating W-2 wages of specified cooperatives. Specifically, in calculating W-2 wages for a tax year under the methods described in Rev. Proc. 2021-11, specified cooperatives must include only wages properly reported on Forms W-2 that meet the provisions of Reg. Sec. 1.199A-11(a), Reg. Sec. 1.199A-8(b)(5)(ii)(B), and Reg. Sec. 1.199A-8(c)(2), as applicable. Generally, the Forms W-2 or any subsequent form or document used in determining the amount of W-2 wages are those issued for the calendar year ending during the tax year of the specified cooperative for wages paid to employees (or former employees) of the specified cooperative for employment by the specified cooperative. For this purpose, employees of the specified cooperative are limited to officers of a corporate taxpayer and employees of the taxpayer under common law rules. Therefore, Forms W-2 provided to statutory employees described in Code Sec. 3121(d)(3) (i.e., Forms W-2 in which the "Statutory Employee" box in Box 13 is checked) are not included in calculating W-2 wages under any of the methods described in Rev. Proc. 2021-11.

Observation: Rev. Proc. 2021-11 clarifies that the discussions of "wages" in Rev. Proc. 2021-11 and in the regulations under Code Sec. 199A(g) are for purposes of Code Sec. 199A(g) only and have no application in determining whether amounts are wages under Code Sec. 3121(a) for purposes of the Federal Insurance Contributions Act, under Code Sec. 3306(b) for purposes of the Federal Unemployment Tax Act, or under Code Sec. 3401(a) for purposes of federal income tax withholding, or any other wage-related determination.

Methods for Calculating W-2 Wages

For any tax year, a specified cooperative must calculate W-2 wages for purposes of its Code Sec. 199A(g) deduction using one of the three methods described in Rev. Proc. 2021-11. Under the first method, the unmodified Box method, W-2 wages are calculated by taking, without modification, the lesser of (1) the total entries in Box 1 of all Forms W-2 filed with SSA by the specified cooperative with respect to employees of the specified cooperative for employment by the specified cooperative; or (2) the total entries in Box 5 of all Forms W-2 filed with SSA by the specified cooperative with respect to employees of the specified cooperative for employment by the specified cooperative.

Under the second method, the modified Box 1 method, the specified cooperative makes modifications to the total entries in Box 1 of Forms W-2 filed with respect to employees of the specified cooperative. W-2 wages under this method are calculated as follows: (1) total the amounts in Box 1 of all Forms W-2 filed with SSA by the specified cooperative with respect to employees of the specified cooperative for employment by the specified cooperative; (2) subtract from that total the amounts included in Box 1 of Forms W-2 that are not wages for federal income tax withholding purposes, including amounts that are treated as wages for purposes of income tax withholding under Code Sec. 3402(o) (for example, supplemental unemployment compensation benefits); and (3) add the total of the amounts reported in Box 12 of Forms W-2 with respect to employees of the specified cooperative for employment by the specified cooperative and that are properly coded D, E, F, G, or S.

Under the third method, the tracking wages method, the specified cooperative actually tracks total wages subject to federal income tax withholding and makes appropriate modifications. W-2 wages under this method are calculated as follows: (1) total the amounts of wages subject to federal income tax withholding that are paid to employees of the specified cooperative for employment by the specified cooperative and that are reported on Forms W-2 filed with SSA by the specified cooperative for the calendar year; and (2) add the total of the amounts that are reported in Box 12 of Forms W-2 with respect to employees of the specified cooperative for employment by the specified cooperative and that are properly coded D, E, F, G, or S.

Application to Short Tax Years

Under Rev. Proc. 2021-11, the W-2 wages of a specified cooperative with a short tax year are required to be determined under the tracking wages method, subject to certain modifications. Specifically, in applying the tracking wages method in the case of a short tax year, the specified cooperative must apply the method as follows:

(1) the total amount of wages subject to federal income tax withholding and reported on Form W-2 must include only those wages subject to federal income tax withholding that are actually or constructively paid to employees during the short tax year and reported on Form(s) W-2 for any calendar year(s) containing any day within that short tax year;

(2) only the portion of the total amounts reported in Box 12, Codes D, E, F, G, or S on Forms W-2, that are actually deferred or contributed during the short tax year are included in W-2 wages; and

(3) if, at the time the specified cooperative files its income tax return, the specified cooperative has paid wages during the short tax year that are reportable but not yet reported as W-2 wages in a Form W-2 filed with the SSA, the specified cooperative may include these wages as W-2 wages for the short tax year, but only if such wages are properly included in a Form W-2 filed with the SSA on or before the 60th day after the due date (including extensions) for the Form W-2.

Modification of Rev. Proc. 2019-11

In Rev. Proc. 2019-11, the IRS provides methods for calculating W-2 wages, as defined in Code Sec. 199A(b)(4) and Reg. Sec. 1.199A-2, for purposes of determining the deduction for qualified business income under Code Sec. 199A(a)(1). Under the tracking wages method in Rev. Proc. 2019-11, W-2 wages are calculated by totaling the amounts of wages subject to federal income tax withholding that are reported on Forms W-2 filed with SSA by the taxpayer for the calendar year and adding to this amount the total of the amounts that are reported in Box 12 of Forms W-2 and that are properly coded D, E, F, G, and S. Rev. Proc. 2019-11 further provides that, in applying the tracking wages method in the case of a short tax year, the total amount of wages subject to federal income tax withholding and reported on Form W-2 must include only those wages subject to federal income tax withholding that are actually or constructively paid to employees during the short tax year and reported on Form W-2 for the calendar year ending with or within that short tax year. In addition, Rev. Proc. 2019-11 provides that taxpayers with a short tax year containing, but not ending on, December 31 can include only W-2 wages actually or constructively paid during the portion of the short tax year in the calendar year ending on December 31, and cannot include the W-2 wages actually or constructively paid during the portion of the short tax year that falls within the following calendar year.

Rev. Proc. 2021-11 modifies Section 6 of Rev. Proc. 2019-11 to provide that taxpayers with a short tax year containing, but not ending on, December 31 can include all wages actually or constructively paid during the short tax year. As a result, the calculation of W-2 wages for taxpayers with short tax years is consistent with the similar provision in Rev. Proc. 2021-11.

For a discussion of the application of Code Sec. 199A to specified agricultural and horticultural cooperatives, see Parker Tax ¶157,100.

Disclaimer: This publication does not, and is not intended to, provide legal, tax or accounting advice, and readers should consult their tax advisors concerning the application of tax laws to their particular situations. This analysis is not tax advice and is not intended or written to be used, and cannot be used, for purposes of avoiding tax penalties that may be imposed on any taxpayer. The information contained herein is general in nature and based on authorities that are subject to change. Parker Tax Publishing guarantees neither the accuracy nor completeness of any information and is not responsible for any errors or omissions, or for results obtained by others as a result of reliance upon such information. Parker Tax Publishing assumes no obligation to inform the reader of any changes in tax laws or other factors that could affect information contained herein.

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