W-2 Limit for Passthrough Deduction
On August 8, 2018, the Treasury Department issued proposed regulations regarding the passthrough deduction under §199A, as added by the new tax law, which was enacted on December 22, 2017.
For the W-2 limit, the proposed regulations indicate that W-2 wages paid from each activity must be separately compared to the passthrough deduction for that activity. Taxpayers with income below an applicable threshold are not subject to the W-2 limit, but for those taxpayers who are subject to the W-2 limit, the proposed regulations are disappointing.
Taxpayers subject to the W-2 limit may own more than one business activity, and while one or more of the activities may pay W-2 wages to employees, other activities may not have employees to which W-2 wages are paid. Since the W-2 limit is separately applied to each business activity, the passthrough deduction will not be allowed for those activities that do not pay W-2 wages to employees.
The proposed regulations provide an option to aggregate certain business activities for the purpose of the passthrough deduction, which would allow a taxpayer to treat separate business activities as one activity for the purpose of the passthrough deduction.
This election could be beneficial for taxpayers who have some business activities that pay W-2 wages to employees and others that do not; under the election, all of the activities would be treated as one single activity. This would mean that the W-2 limit would be applied only once to the aggregated set of activities, instead of separately to each activity. However, the proposed regulations set forth requirements for this aggregation election, and for taxpayers that do not meet the requirements, the aggregation election will not be allowed.
Some affected taxpayers who are not eligible for the aggregation election may find it beneficial to begin paying W-2 wages to employees (including owners of the activity), to be able to benefit from the passthrough deduction.