199A – 2 Wage Allocation by a Third Party – Primarily RE Mgmt / Owners

When must / can an entity allocate W2 wages to another entity for the purpose of calculating the QBI limitations and/or reporting by a RPE (Relevant Pass-Through Entity)?

I am struggling to arrive at a concise answer on this topic, I was hoping for some clarity from the Intuit Tax Community.  The assumption is that the Real Estate Entity (REE) exerts significant direct control over the Mgmt Company’s Employee’s work, directing how the work is done, when the work needs to be done, what materials to use, etc., and in related party cases can cause the actual termination of an employee.  I have found the following:

Per the 199A Final Regulations, page 180, 199A-2(b)(2)(ii) I conclude this states: A Taxpayer may include W2 wages paid by another person and reported on that other persons W2/W3 provided that the W2 wages are related to an individual’s labor that otherwise are the Taxpayers common law employees (the taxpayer has the right to control the details of how the services are performed).  I see 3 situations:

1) an unrelated Management Company with multiple clients – doubt the Mgmt Co Employee rises to the level of a common law employee of the rental, but common law says what matters most is control so maybe?.  I can’t see the Mgmt Co wanting to allocate its wages, unless contractually agreed in writing, so I conclude NO, these W2 wages would not be allocatable unless agreed to in writing.

2) a related party / controlled Mgmt Co with only related party clients (a centralized Mgmt Co that services only related party entities) – I believe the employee does rise to the level of a common law employee (they could easily be fired by the RE Entity, certainly the work is directed by the RE owner – which is also the mgmt co owner);

3) an unrelated Mgmt Co with only one client – it seems in this case there is enough control that the employee would rise to the level of a common law employee (if the RE Client did not like an employee, and not allow them to perform work, they would be effectively terminated).  But given they are un-related, it seems this would have to be in writing.

Bessemer Trust 199A – They have a 20 page analysis that on page 8 item 2 summarizes a “Management Company Exception” that outlines the situation where a RE investor has multiple LLC’s and a Centralized Mgmt Co (which I assume is also a separate entity), they conclude Reg 199A-2(b)(2)(II) does allow the allocation of W2 wages in this circumstance (situation 2 in my summary above).

Forbes Pass Through Deduction Article – They have a lengthy article that about 80% through has an entire section on W2 wages and states “the most important aspect of the final regulations is the flexibility afforded to taxpayers to allocate W2 wages paid by another party to a business as long as those wages were paid on behalf of common-law employees of the business receiving the allocation”.  So this issue seems to revolve around determining common law employee status, no easy matter.

Of course I doubt these are “substantial authorities”, but I assume both have people much smarter than I am.  The question seems to pivot around classifying the Common Law Employee, but I could not find anything that suggest an employee could be a common law employee of two entities at once.  The 199A regulations in the sections noted above state that the entity paying the actual wages that allocates W2 wages “can include, but are not limited to, [CPO, statutory employers, and agents]”.  So this appears to support the situations I outlined above in at least situations 2 and 3.

Finally, 199A-2(b)?(3) (page 184 – Allocation of wages) the regulations talk about a RPE that directly conducts more than one business MUST allocate wages among the various businesses.  I am not clear if a majority owner or managing member of say 2 LLC’s where one is the Mgmt co and one is the RE operations would be considered to DIRECTLY  or INDIRECTLY  conduct more than one business and therefore the allocation is required. 

Wow this is fun!  Fellow Tax Pros – any thoughts or clarity on this topic would be appreciated!