John Bullis: Wages defined for qualified business 20 percent deduction

IRS has issued final regulations on the new deduction for 20 percent of business profits under Section 199A. Part of the regulations explain the definition of “wages.”

The wages for that computation are not what some folks think.

Using the 2018 W-2 forms means the total taxable wages in box 1, plus some other items.

The total of amounts listed in box 12 of the W-2 should be added to the amounts in box 1 to get the total of wages for this special computation.

Box 12 of the W-2 form amounts that are coded D, E, F, G and S should be used also.

Box 12, code D is for elective deferrals for the Section 401(k) plan including a SIMPLE 401(k) arrangement. SIMPLE 401(k) is just another retirement plan with special rules. Wages in box 1 are reduced by the contributions to the 401(k) plan.

Box 12, code E is for elective deferrals under a Code Section 403(b) salary reduction arrangement.

Wages in box 1 don’t include the contributions to that retirement plan.

Box 12, code F is for elective deferrals under Code Section (408(k)(6) salary reduction for Simplified Employee Pension (SEP) contributions. Those retirement plan contributions aren’t included in box 1 either.

Box 12, code G is for elective deferrals and employer contributions (including nonelective deferrals) to any governmental or nongovernmental Code Section 457(b) deferred compensation plan. Those aren’t included in box 1 either.

Box 12, code S is the employee salary reduction contributions under a Code Section 480(p) SIMPLE which is a special type of retirement plan.

Roth contributions are marked in box 12, code AA as a memo item only. The designated Roth contributions are reported in box 1 – so no adjustment is made for Roth Contributions.

The total “wages,” including items in the boxes above, are used to determine the amount of the special code 199A deduction for business profits. Using the correct definition of wages may increase the deduction in some cases.

Did you hear “Congress should reduce the choices of various retirement plans to just one or two plans?”

John Bullis is a certified public accountant, personal financial specialist and certified senior adviser who has served Carson City for 45 years. He is founder emeritus of Bullis and Co. CPAs.


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