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 www.claconnect.com or call 888-529-2648.
52
NATDA Magazine www.natda.org