rp-21-11.pdf

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26 CFR 1.199A-11: Wage limitation for the section 199A(g) deduction
Rev. Proc. 2021-11
SECTION 1. PURPOSE
This revenue procedure provides methods for calculating W-2 wages as defined in
section 199A(g)(1)(B)(ii) of the Internal Revenue Code (Code) and §1.199A-11 of the
Income Tax Regulations for purposes of the W-2 wage limitation provided in
section 199A(g)(1)(B)(i). Specified agricultural or horticultural cooperatives (Specified
Cooperatives) are permitted a deduction under section 199A(g)(1)(A) equal to the lesser
of 9 percent of qualified production activities income (QPAI) or taxable income of a
Specified Cooperative, but not to exceed the W-2 wage limitation. This revenue
procedure also modifies Revenue Procedure 2019-11, 2019-09 I.R.B. 742, to amend
the method for determining W-2 wages for taxpayers with short taxable years.
SECTION 2. BACKGROUND
.01 Section 199A(g)(1)(B)(i) limits the amount of the deduction under
section 199A(g)(1)(A) to 50 percent of the W-2 wages of the Specified Cooperative (as
defined in §1.199A-8(a)(2)) for the taxable year. Section 199A(g)(1)(B)(ii) provides that
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W-2 wages are determined in the same manner as under section 199A(b)(4), without
regard to section 199A(b)(4)(B) (which excludes from the definition amounts not
properly allocable to qualified business income for purposes of section 199A(c)(1)) and
after application of section 199A(b)(5) (concerning acquisitions, dispositions, and short
taxable years), except that such wages do not include any amount which is not properly
allocable to domestic production gross receipts (DPGR) for purposes of
section 199A(g)(3)(A).
.02 Section 199A(b)(4)(A) defines the term W-2 wages to mean, with respect to any
person for any taxable year of such person, the amounts described in
section 6051(a)(3) and (8) of the Code paid by such person with respect to employment
of employees by such person during the calendar year ending during such taxable year.
Section 199A(b)(4)(C) provides that W-2 wages shall 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.
.03 Section 1.199A-11(c) provides the Internal Revenue Service with authority to
issue guidance providing computational methods that may be used to calculate W-2
wages.
.04 This revenue procedure provides three methods for calculating W-2 wages (as
defined in section 199A(g)(1)(B)(ii) and §1.199A-11) for purposes of section 199A(g)
and the regulations thereunder. 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.
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.05 W-2 wages calculated under this revenue procedure are not necessarily the W-2
wages that are properly allocable to DPGR and eligible for use in computing the
section 199A(g) limitations. Under §1.199A-8(b)(5)(ii)(B), a Specified Cooperative that
is not qualified as a farmer’s cooperative organization under section 521 of the Code
(nonexempt Specified Cooperative) must use only patronage W-2 wages that are
properly allocable to patronage DPGR to compute its section 199A(g)(1)(B)(i) W-2 wage
limitation. Under §1.199A-8(c)(2), a Specified Cooperative that is qualified as a farmer’s
cooperative organization under section 521 (exempt Specified Cooperative) must
calculate separate patronage and nonpatronage deductions under
section 199A(g)(1)(A) and apply separate patronage and nonpatronage W-2 wage
limitations (unless an exempt Specified Cooperative treats all of its nonpatronage gross
receipts and related deductions as patronage as described in §1.199A-8(b)(2)(ii), in
which case, only one W-2 wage limitation would apply). Under §1.199A-11(b)(2) the
Specified Cooperative must determine the amount of wages that is properly allocable to
DPGR for purposes of calculating QPAI (as defined in section 199A(g)(3)(A)). The
Specified Cooperative may use any reasonable method that is satisfactory to the
Secretary of the Treasury or his delegate based on all of the facts and circumstances.
The chosen reasonable method must be consistently applied from one taxable year to
another and must clearly reflect the wages allocable to DPGR for purposes of QPAI.
The books and records maintained for wages allocable to DPGR for purposes of QPAI
must be consistent with any allocations. Then, the amount of W-2 wages that are
properly allocable to DPGR is used in determining the W-2 wage limitation under
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section 199A(g)(1)(B)(i) as determined under §1.199A-8(b)(5)(ii)(B) or §1.199A-8(c)(2)
depending upon whether the Specified Cooperative is nonexempt or exempt,
respectively.
SECTION 3. RULES OF APPLICATION
.01 In general. In calculating W-2 wages for a taxable year under the methods
described in this revenue procedure, include only wages properly reported on Forms W-
2 that meet the applicable rules of §1.199A-11(a), §1.199A-8(b)(5)(ii)(B), and §1.199A-
8(c)(2), as applicable. Specifically, §1.199A-11(a)(2) provides that, except as provided
in §1.199A-11(d)(2) (concerning short taxable years that do not include December 31),
the Forms W-2, Wage and Tax Statement, 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 taxable year of the Specified Cooperative for wages paid to employees (or
former employees) of the Specified Cooperative for employment by the Specified
Cooperative. Section 1.199A-1 1(a)(1) also provides that, for purposes of §1.199A-11,
employees of the Specified Cooperative are limited to employees of such Specified
Cooperative as defined in section 3121(d)(1) and (2) of the Code (that is, officers of a
corporate taxpayer and employees of the taxpayer under the common law rules).
Therefore, Forms W-2 provided to statutory employees described in section 3121(d)(3)
(that is, Forms W-2 in which the “Statutory Employee” box in Box 13 is checked) should
not be included in calculating W-2 wages under any of the methods described in this
revenue procedure.
.02 No application in determining whether amounts are wages for employment tax
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purposes. The discussions of “wages” in this revenue procedure and in the regulations
under section 199A(g) are for purposes of section 199A(g) only and have no application
in determining whether amounts are wages under section 3121(a) for purposes of the
Federal Insurance Contributions Act, under section 3306(b) of the Code for purposes of
the Federal Unemployment Tax Act, or under section 3401(a) of the Code for purposes
of the Collection of Income Tax at Source on Wages (Federal income tax withholding),
or any other wage-related determination. See §1.199A-11(a)(1) of the regulations.
SECTION 4. DEFINITION OF W-2 WAGES AND CORRELATION WITH BOXES ON
FORM W-2
.01 Definition of W-2 wages. Section 199A(g)(1)(B)(ii) provides that W-2 wages are
determined in the same manner as under section 199A(b)(4) (without regard to
section 199A(b)(4)(B)). Section 199A(b)(4)(A) provides that W-2 wages means, with
respect to any person for any taxable year of such person, the sum of the amounts
described in section 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 taxable year.
Thus, as also provided in §1.199A-11(b)(1), W-2 wages include: (i) the total amount of
wages (as defined in section 3401(a)); (ii) the total amount of elective deferrals (within
the meaning of section 402(g)(3) of the Code); (iii) the compensation deferred under
section 457 of the Code; and (iv) the amount of designated Roth contributions (as
defined in section 402A of the Code).
.02 Correlation with Form W-2. The elective deferrals under section 402(g)(3) and
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the amounts deferred under section 457 directly correlate to coded items reported in
Box 12 on the 2019 Form W-2. Box 12, Code D is for elective deferrals to a
section 401(k) cash or deferred arrangement plan (including a SIMPLE 401(k)
arrangement); Box 12, Code E is for elective deferrals under a section 403(b) salary
reduction agreement; Box 12, Code F is for elective deferrals under a section 408(k)(6)
salary reduction Simplified Employee Pension (SEP); Box 12, Code G is for elective
deferrals and employer contributions (including nonelective deferrals) to any
governmental or nongovernmental section 457(b) deferred compensation plan; Box 12,
Code S is for employee salary reduction contributions under a section 408(p) SIMPLE
(simple retirement account); Box 12, Code AA is for designated Roth contributions (as
defined in section 402A) under a section 401(k) plan; and Box 12, Code BB is for
designated Roth contributions (as defined in section 402A) under a section 403(b)
salary reduction agreement. However, designated Roth contributions are also reported
in Box 1, wages, tips, other compensation and are subject to Federal income tax
withholding.
SECTION 5. METHODS FOR CALCULATING W-2 WAGES
For any taxable year, a Specified Cooperative must calculate W-2 wages for
purposes of section 199A(g)(1)(B)(i) using one of the three methods described in
section 5.01, 5.02, and 5.03 of this revenue procedure. For a Specified Cooperative
with a short taxable year, see section 6 of this revenue procedure. In calculating W-2
wages for a taxable year under the methods described in section 5.01, 5.02, and 5.03 of
this revenue procedure, the Specified Cooperative includes only those Forms W-2 that
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are for the calendar year ending with or within the taxable year of the Specified
Cooperative and that meet the rules of application described in section 3 of this revenue
procedure.
.01 Unmodified Box method. Under 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 described in section 5.01(1) of this
revenue procedure.
.02 Modified Box 1 method. 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 ) 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 the total in section 5.02(1) of this revenue procedure 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 section 3402(o) of the Code (for example, supplemental
unemployment compensation benefits within the meaning of Rev. Rul. 90-72, 1990-2
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C.B. 211); and
(3 ) Add to the amount obtained after section 5.02(2) of this revenue procedure 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.
.03 Tracking wages method. 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) 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 to the amount obtained after section 5.03(1) of this revenue procedure 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.
SECTION 6. APPLICATION IN CASE OF SHORT TAXABLE YEAR
.01 Special rule for Specified Cooperative with a short taxable year. In the case of a
Specified Cooperative with a short taxable year, subject to the rules of application
described in section 3 of this revenue procedure, the W-2 wages of the Specified
Cooperative for the short taxable year shall include only those wages paid during the
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short taxable year to employees of the Specified Cooperative, only those elective
deferrals (within the meaning of section 402(g)(3)) made during the short taxable year
by employees of the Specified Cooperative, and only compensation actually deferred
under section 457 during the short taxable year with respect to employees of the
Specified Cooperative. See §1.199A-11(e) of the regulations.
.02 Method required for a short taxable year and modifications required in application
of method. The W-2 wages of a Specified Cooperative with a short taxable year shall
be determined under the tracking wages method described in section 5.03 of this
revenue procedure. In applying the tracking wages method in the case of a short
taxable year, the Specified Cooperative must apply the method as follows—
(1 ) For purposes of section 5.03(1) of this revenue procedure, 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 taxable year and reported on Form(s)
W-2 for any calendar year(s) containing any day within that short taxable year;
(2 ) For purposes of section 5.03(2) of this revenue procedure, 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 taxable year are included in W-2
wages; and
(3 ) For purposes of this section 6.02, if, at the time the Specified Cooperative files
its income tax return, the Specified Cooperative has paid wages during the short taxable
year that are reportable but not yet reported as W-2 wages in a Form W-2 filed with the
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Social Security Administration (SSA), the Specified Cooperative may include these
wages as W-2 wages for the short taxable 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.
SECTION 7. MODIFICATION OF REVENUE PROCEDURE 2019-11
.01 Revenue Procedure 2019-11 provides methods for calculating W-2 wages, as
defined in section 199A(b)(4) and § 1.199A-2 , for purposes of determining the deduction
for qualified business income under section 199A(a)(1). Section 6 of Rev. Proc. 2019-
11 provides a method for determining W-2 wage in the case of a taxpayer with a short
taxable year. Specifically, section 6.01 of Rev. Proc. 2019-11 provides that for
purposes of determining W-2 wages in the case of a taxpayer with a short taxable year,
“the W-2 wages of a taxpayer with a short taxable year shall be determined under the
tracking wages method described in section 5.03 of this revenue procedure.”
.02 Under the tracking wages method in section 5.03 of Rev. Proc. 2019-11, W-2
wages are calculated by totaling the amounts of wages subject to Federal income tax
withholding that are paid to employees of the taxpayer for employment by the taxpayer
and 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 with respect to employees of the taxpayer for employment by the taxpayer and that
are properly coded D, E, F, G, and S. Section 6.02(A) of Rev. Proc. 2019-11 further
provides that, in applying the tracking wages method in the case of a short taxable year,
“the total amount of wages subject to Federal income tax withholding and reported on
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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 taxable year and
reported on Form W-2 for the calendar year ending with or within that short taxable year
(or, for a short taxable year that does not contain a calendar year ending with or within
such short taxable year, wages subject to federal income tax withholding that are
actually or constructively paid to employees during the short taxable year and reported
on Form W-2 for the calendar year containing such short taxable year).”
.03 Under section 6.02(A) of Rev. Proc. 2019-11, taxpayers with a short taxable year
containing, but not ending on, December 31 can include only W-2 wages actually or
constructively paid during the portion of the short taxable 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 taxable year that falls within the following calendar
year. Section 6 of this revenue procedure, which similarly addresses calculating W-2
wages for taxpayers with a short taxable year, addresses this issue by providing that,
for purposes of section 5.03 of this revenue procedure (which parallels section 5.03 of
Rev. Proc. 2019-11), the total amount of wages subject to Federal income tax
withholding and reported on Form W-2 includes wages subject to Federal income tax
withholding that are actually or constructively paid to employees during the short taxable
year and reported on Form(s) W-2 for any calendar year(s) containing any day within
that short taxable year. In addition, section 6.02 of this revenue procedure provides that
a Specified Cooperative may include in W-2 wages for the short taxable year any wages
paid during the short taxable year that are otherwise includable as W-2 wages except
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that they have not been reported on Forms W-2 because the Forms W-2 on which those
wages must be reported are not yet due, 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 such return.
.04 This revenue procedure modifies Rev. Proc. 2019-11 so that taxpayers with a
short taxable year containing, but not ending on, December 31 can include all wages
actually or constructively paid during the short taxable year, and so that the provision in
section 6 of Rev. Proc. 2019-11 concerning the calculation of W-2 wages for taxpayers
with short taxable years is consistent with the similar provision in section 6 of this
revenue procedure.
.05 Accordingly, section 6.02 of Rev. Proc. 2019-11 is modified to read as
follows:
.02 Method required for a short taxable year and modifications required in application
of method. The W-2 wages of a taxpayer with a short taxable year shall be determined
under the tracking wages method described in section 5.03 of this revenue procedure.
In applying the tracking wages method in the case of a short taxable year, the taxpayer
must apply the method as follows—
(A) For purposes of section 5.03(A) of this revenue procedure, 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 taxable year and reported on Form(s)
W-2 for any calendar year(s) containing any day within that short taxable year;
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(B) For purposes of section 5.03(B) of this revenue procedure, 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 taxable year are included in W-2
wages; and
(C) For purposes of this section 6.02, if, at the time of the filing of the taxpayer’s
income tax return, the taxpayer has paid wages during the short taxable year that are
re portable but not yet reported as W-2 wages in a Form W-2 filed with the Social
Security Administration (SSA), then the taxpayer may still include those wages as W-2
wages for the short taxable 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 such return.
SECTION 8. EFFECT ON OTHER REVENUE PROCEDURES
Revenue Procedure 2019-11 is modified by section 7 of this revenue procedure.
SECTION 9. EFFECTIVE DATE
This revenue procedure applies to taxable years ending after December 31, 2017.
SECTION 10. DRAFTING INFORMATION
The principal authors of this revenue procedure are Andrew Holubeck and Mikhail
Zhidkov of the Office of the Associate Chief Counsel (Employee Benefits, Exempt
Organizations, and Employment Taxes) and Jason Deirmenjian of the Office of the
Associate Chief Counsel (Passthroughs & Special Industries). However, other
personnel from the Department of the Treasury and the Internal Revenue Service
participated in its development. For further information regarding this revenue
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procedure contact Andrew Holubeck or Mikhail Zhidkov at (202) 317-4774, or Jason
Deirmenjian at (202) 317-4470.
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