IRS Update: Calculating W-2 Wages for Purposes of 199A(g) – Dennis Gardiner, Managing Partner, CPA

The IRS recently released a proposed revenue procedure providing computational guidance on methods and appropriate sources of data for calculating W-2 wages for purposes of section 199A(g) of the Internal Revenue Code (IRC). The notice provides three methods for calculating W-2 wages, limiting the amount of the deduction available to agricultural and horticultural cooperatives to 50 percent of the cooperative’s W-2 wages for the taxable year.

The guidance was issued because changes may be made to the underlying W-2 Wage and Tax Statement on a more frequent basis than updates to the regulations under section 199A(g). The three methods are substantially similar to the methods used in the past under section 199. We must still make a determination of W-2 wages properly allocable to patronage and non-patronage domestic production gross receipts (DPGR) for purposes of calculating qualified production activities income (QPAI).

The proposed revenue procedure defines wages as (1) W-2 wages; plus (2) elective deferrals such as 401(k), 403(b), 457(b) SEP, SIMPLE and Roth contributions (found historically in boxes 1 and box 12 of the W-2 wage statement).

The proposed revenue procedure provides for three methods of calculating W-2 wages for purposes of 199A(g): 1) unmodified box method; 2) modified box 1 method; and 3) tracking wages method. In circumstances where a short tax year is encountered, the tracking wages method is required.

The effective date of this revenue procedure applies to taxable years ending after December 31, 2017. We will discuss this with you as we calculate your deductions this year.