NATDA Magazine Nov/Dec Nov2018Mag_FINAL - Page 52

Aggregating related businesses may enhance the 199A deduction for all owners Although the W-2 limitations mentioned above may not be an issue for your dealership, they could be problematic for entities that have few employees or depreciable assets, such as RFCs, related car wash or other businesses, and certain real estate entities that hold your dealership’s land or buildings. But the IRS’s guidance may offer a solution. Your dealership can elect to aggregate related business activities together for the purposes of the wage limitation and/or depreciable asset limitations. Careful aggregation of such related businesses will be important to provide the combined reporting necessary to claim the 199A deduction. This limitation is not applicable to those with taxable income less than $315,000 who file a joint return, or to single filers with less than $157,500 of income. The W-2 and depreciable property limitation completely phases out once taxable income exceeds $415,000 for joint filers and $207,500 for individual filers. Because payroll is usually one of your largest expenses, most dealerships will not have any problem satisfying the 50 percent W-2 wage limitation; you will likely deduct the entire 199A deduction available. But questions have arisen about the eligibility for dealers with multiple rooftops that share employees or use a management company, professional employer organization (PEO), or other employee leasing arrangement to pay wages, since the employees are not paid directly by your dealership. The IRS’s guidance confirms that, yes, the 199A deduction generally will be allowed for shared, common law employees. These common law employers will be able to include W-2 wages from other entities, assuming they can be directly allocated to the business, even if they are not paid directly by your entity. There will likely be requirements for specific reporting or recordkeeping of such allocations from other employers. The W-2 wages are specific, however, to each trade or business. The aggregated entities must have at least 50 percent common ownership between the entities. Testing of such common ownership will be critical and will need to be made by each of the dealership’s owners. For example, assume a dealership, an RFC, and a related rental real estate entity are each owned 40 percent by a father and 30 percent by his three sons, with the remaining 30 percent owned by unrelated (but different) individuals. The three entities would pass the common ownership test, as the father and his sons would be considered common majority owners (70 percent). Because the 50 percent or more common ownership test is passed, the common owners may make the election. The decision to aggregate is available to each owner. In addition to the majority ownership requirements, you must also demonstrate that the aggregated businesses are part of a large, integrated business structure by meeting two of three requirements: 1. The businesses must provide products or services that are the same or customarily provided together 2. The business must share facilities or significant centralized business elements, such as using common employees; accounting functions; or legal, purchasing, or information technology resources 3. The businesses operate in coordination with or reliance on each other For more information on CliftonLarsonAllen, please visit or call 888-529-2648. 52 NATDA Magazine