Discussion:Does anyone know how to apply the Sec 199 Deduction payroll limits to members/partners in pass-through entites?
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Discussion Forum Index --> Tax Questions --> Does anyone know how to apply the Sec 199 Deduction payroll limits to members/partners in pass-through entites?
| 28 February 2007 | |
| The Regs make absolutely no sense to me and I have a bunch of construction entities that need Sec. 199 deduction computed and passed through to the owners, who get a ton of other k-1's from other entities. I would love to understand how the rules apply to pass through entities. Any info/lead would be appreciated. Hope you are having as good a tax season as possible. | |
| 28 February 2007 | |
| Yes I do. What specifically is your question?
The pass-through entities pass through the individual components of the ยง199 deduction (QPAI, W-2, etc) in proportion to ownership. The deduction is taken at the taxpayer level. | |
| 28 February 2007 | |
| Also, please fill out your profile. Thanks. I'll answer more if you tell me what you want to know. | |
| February 28, 2007 | |
| Good software is key. Do the 1120s or 1065, do the 8903. Then, in the 1040, import the K1 from that pass thru. You won't get it to bring in all the numbers, but you'll have a schedule that gives you all the numbers for filling in the blanks. | |
| 28 February 2007 | |
| Thanks for your help guys; the question is - I am working on a real estate development client that hia its jobs set up as various LLC's, which flow up to the development company through schedule K-1's. The development company is family owned. In some cases, some of the job LLC's have no wages but lots of profit. Other job llc's don't have profits but have wages. can we/are we supposed to carry the info on up through to the owners at the top and aggregate all wages and profits and losses in order to compute thh deduction? I hope I am coherent in the way I have asked the question. I appreciate the help and hope your tax season is going as well as possible.
-Marc | |
| 28 February 2007 | |
| For 2005 and 2006 yes, but because of TIPRA next year if there is no W-2 income paid from an entity, it can't pass through QPAI. | |
| March 1, 2007 | |
| Here is my take on this - in general [for both 2006 and 2007 - except as provided in Regs 1.199-5T(b)(1)(ii) and 1.199-9(b)(1(ii), which open the door for the Secretary to permit computation at the partnership level], the section 199 deduction is computed at the partner level based on the partner's combined share of QPAI (both positive and negative) and W-2 from partnerships as well as from other sources.
Treatment for 2006: W-2 wages from a partnership are limited to the lesser of (i) the partner's share of W-2 wages or (ii) 6% of the partner's share of the partnership's QPAI. Accordingly, if the partnership's QPAI is zero or less, the partner's share of W-2 from the partnership will be zero. DPGR and QPAI will still pass through to the partner to be used in conjunction with other sources of DPGR, QPAI and W-2 wages (even if such W-2 wages are not related to DPGR). Simple example: LLC-1 has QPAI of $1,000 and $0 W-2 wages while LLC-2 has $0 QPAI and $500 of W-2 wages. Assuming no other qualified activities, the section 199 deduction as determined at the partner level would be zero because the partner's share of W-2 is zero. Treatment for 2007: TIPRA eliminates the "6% x QPAI" limitation and replaces it with a new limitation. Beginning in 2007, a partner is allocated his % share of W-2 wages regardless of QPAI; however, such W-2 wages are limited to those that are "properly allocable to DPGR" [note: there is no guidance yet on what this phrase means so this is one of those provisions that will probably be the source of many debates unless some sort of bright-line test is adopted]. Based on the temporary regs under 1.199-5T(b)(1)(i), the determination of "properly allocable to DPGR" appears to take place at the partner level; thus, all of a partnership's W-2 wages (allocable to both DPGR and non-DPGR) are passed through to the partners for further determination as to what amount will be treated as properly allocable to DPGR. Although the mechanics of that determination are currently unspecified, assuming that RE development is all that the LLC's do, it seems fairly certain that any W-2 would be allocable to DPGR. Therefore, in 2007, the simple example above would result in a $250 section 199 deduction (i.e., 50% of the W-2 wages). | |
| 7 March 2008 | |
| For 2007, there is an election to figure QPAI at the entity level if the pass-through entity is eligible. The instructions are so confusing on Form 8903 and I can't figure if my client is an eligible entity or not. Also, is there any benefit to electing the calculation at the entity level? | |
