Thank you, I appreciate the concise points, but respectfully I don’t see specifics in your response that lead me to dismiss my conclusion. I have gone over both the Reg’s and Preamble, but I have not been able to extract the clarity you suggest. Please, any succinct advice you or other tax professional can provide would be helpful for all!

The Question (simplified?):

When may (must) W2 wages be allocated between entities for the sole purpose of the QBI limitation calculations in the phase out range?

Itonewbie’s reply states “W-2 wages paid by third party property management companies to their employees are not relevant to rental enterprises”. I suggest the IRS regulations stipulate otherwise:

199A-2(b)(2)(ii) states W2 wages payed and reported “on behalf of …others can include, but are not limited to, certified professional employer organizations….statutory employers…and agents”. The regulation appears to present the case where one entity reports the W2 wages, but the work is actually done for and controlled another entity. The “but not limited to” suggest that in the case of a centralized management company, this allocation of W2 wages can be applied. I don’t see anything in the preamble that specifically rejects this finding.

The second hurdle to overcome is then who is the common law employer. Common Law Rules per the IRS (https://www.irs.gov/businesses/small-businesses-self-employed/employee-common-law-employee): “Under common-law rules, anyone who performs services for you is your employee if you can control what will be done and how it will be done.  [deleted] What matters is that you have the right to control the details of how the services are performed.”  Certainly anyone that is a hands-on owner of Real Estate knows they exert significant control over the people that work at the property (and generally have to be constantly supervised).

I understand it is this right of control, (exercised or not), that is the most important detail to determine relationship. A right to discharge a worker at will is also strong evidence of control. It seems that using the IRS definition, an individual could easily have multiple common law employers.

This definition of a Common Law Employer is certainly broad, I submit it is designed to distinguish between an independent contractor vs employee, it was not meant to distinguish or measure a degree of control between two entities where both can exert control. This is what gives rise the need to allocate W2 wages, limited by the single fact that the allocation of the W2 attribute cannot be duplicated, only one entity can claim them.

In the situation of a traditional Management Entity & Operation Entity relationship, I submit if the unrelated Management Company hires a person dedicated to an individual owners’ operations, and the owner manages that person’s work almost exclusively, the definition of common law employer is met. However, to avoid duplication of reporting the QBI W2 wages for the limitation calculation, it seems a written agreement would be needed before the Operating Entity could use the allocated wages (the assumption is the actual expense is already on the Operating Entities books as either management fees or a reimbursement of the employee cost). This is a situation where the W2 wages can be allocated (vs must be).

In the situation of related party Management Entity & Operated Entity, clearly the Operating Entity has the ability to control the employees work, in addition to being able to discharge the worker (the same person controls the ME and OE) in the same manner as Professional Employee Organization. Again, the actual employee cost is already reflected / allocated on the books of the Operating Entity through management fees or direct reimbursement. Here is seems clear the W2 characteristics MUST BE allocated to the Operating Entity because the individual directly conducts more than one trade or business.

I submit as support for this conclusion: 199A2(b)3 which states “each individual…that directly conducts more than one trade or business MUST allocate those wages amount its various trade or businesses. W2 wages must be allocated to the trade or business that generated those wages.”  This seems very clear and I cannot find evidence to the contrary in the preamble.

199A Background:

199A was designed to provide business owners (including certain real estate owners) tax relief (just as Corporations were given a tax rate decrease). The lengthy preamble of 199A suggests the regulations allow a taxpayer great flexibility in certain application of the regulations to most accurately report the character of revenue and expenses and tax attributes in manner that best represents an Individual’s or RPE’s separate trade or business.

Yet, despite spending hours striving to understand 199A, I acknowledge my lack of tax regulation interpretation skill-set (certainly it’s very own specialty) in this specific area of allocating W2 wages has not produced the level of clarity that I desire.

Thus, as a tax professional striving to best represent my client, I ask for help in finding errors in my analysis or suggest that this is a fantastic tool we should all use to help our clients maximize their potential QBI deduction.

So, can (or must) a Centralized Management Company allocate the 199A W2 wage attribute to the Operational Entity where the services are actually being performed, for purposes of calculating the potential QBI deduction limitation? If no, does the situation where the companies are related parties change the answer based on the regulations noted above? Finally, am I correct that the answer to these questions are applied the same between two “business” or a “business and real estate operation”?

Sincerely,

LRD