IRS Guidance Addresses Section 199A W-2 Wage Calculation for Certain Co-ops

(Parker Tax Publishing June 2019)

The IRS issued a proposed revenue procedure that provides computational guidance on methods, and appropriate sources of data, for calculating W-2 wages for purposes of Code Sec. 199A(g). Specifically, three methods are provided for calculating W-2 wages for purposes of Code Sec. 199A(g)(1)(B)(i), which limits the amount of the deduction available to specified agricultural or horticultural cooperatives under Code Sec. 199A(g)(1)(A) to 50 percent of such cooperative's W-2 wages for the tax year. Notice 2019-27.

Background

Under Code Sec. 199A(g)(1)(A), specified agricultural or horticultural cooperatives (specified cooperatives) may claim a special deduction in an amount equal to 9 percent of the lesser of qualified production activities income (QPAI) of the specified cooperative for the tax year determined under Code Sec. 199A(g)(3)(A), or the taxable income of the specified cooperative for the tax year determined under Code Sec. 199A(g)(1)(C). Code Sec. 199A(g)(1)(B)(i) limits the amount of this deduction to 50 percent of the W-2 wages of the specified cooperative for the tax year. Code Sec. 199A(g)(1)(B)(ii) provides that 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 application of Code Sec. 199A(b)(5) (concerning acquisitions, dispositions, and short tax years), except that such wages do not include any amount that is not properly allocable to domestic production gross receipts (DPGR) for purposes of Code Sec. 199A(g)(3)(A).

Code Sec. 199A(b)(4)(A) defines the term W-2 wages to mean, with respect to any person for any tax year of such person, the amounts described in Code Sec. 6051(a)(3) and Code Sec. 6051(a)(8) paid by such person with respect to employment of employees by such person during the calendar year ending during such tax year.

In Notice 2019-27, the IRS provides a proposed revenue procedure which provides guidance on the methods for calculating the amount of W-2 wages for purposes of determining the deduction limitation in Code Sec. 199A(g)(1)(B)(i).

Three Methods for Calculating W-2 Wages

Under the proposed revenue procedure issued in Notice 2019-27, the IRS provides three methods for calculating W-2 wages for purposes of Code Sec. 199A(g) and the regulations thereunder. The first method - the Unmodified Box Method - allows for a simplified calculation, while the second and third methods - the Modified Box 1 Method and the Tracking Wages Method - provide greater accuracy. W-2 wages calculated under the proposed revenue procedure are not necessarily the W-2 wages that are properly allocable to DPGR and eligible for use in computing the Code Sec. 199A(g) limitations.

A specified cooperative that is not qualified as a farmer's cooperative organization under Code Sec. 521 (i.e., a nonexempt specified cooperative) must use only patronage W-2 wages that are properly allocable to patronage DPGR to compute its Code Sec. 199A(g)(1)(B)(i) W-2 wage limitation. A specified cooperative that is qualified as a farmer's cooperative organization must calculate separate patronage and nonpatronage deductions under Code Sec. 199A(g)(1)(A) and apply separate patronage and nonpatronage W-2 wage limitations. The specified cooperative must determine the amount of wages that is properly allocable to DPGR for purposes of calculating qualified production activities income (QPAI). The specified cooperative may use any reasonable method that is satisfactory to the IRS based on all of the facts and circumstances. The chosen reasonable method must be consistently applied from one tax year to another and must clearly reflect the wages allocable to DPGR for purposes of QPAI.

Methods for Calculating W-2 Wages

As noted above, there are three methods for calculating W-2 wages for purposes of Code Sec. 199A(g). Under the Unmodified Box Method, W-2 wages are calculated by taking, without modification, the lesser of:

(1) the total entries in Box 1; or

(2) the total entries in Box 5

of all Forms W-2 filed with the Social Security Administration (SSA) by the specified cooperative with respect to employees of the specified cooperative for employment by the specified cooperative.

Under 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) 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 are combined;

(2) subtract from the total in (1), above, 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); and

(3) add to the amount obtained after (2), above, 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.

Under 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) Combine 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 to the amount obtained after (1), above, 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.

Special rules are provided for short tax years.

The revenue procedure is proposed to apply to tax years ending after December 31, 2017.

For a discussion of Code Sec. 199A(g) and the rules relating to specified cooperatives, see Parker Tax ¶157,101.

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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