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199A Wages & Property Domestic vs International


G2R

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I'm going crazy trying to find an exact publication that I can reference down the road if need be.  I have a clients that does construction both domestically and internationally and everything I'm reading says wage in connection with QBI income.  I assume the property basis is the same but cannot find this specifically written anywhere. 

We used to file the DPAD so I feel the answer is somewhat similar and I can just use my same methods from previous years, but I'm just spinning in place trying to double-triple-quanta-quasi-check myself. 

Here are simple details:

Total income is 2 million.  Wages were $800k.  Unadjusted Property is 100k. 35% was domestic income.  So K-1 inputs would be:

Code V: (2 mil x 35% domestic) 700k

Code W:  (800k x 35%) 280k

Code X: (100k x 35%) 35k

Sounds reasonable?

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Qualified business income must be effectively connected with a U.S. trade or business within the meaning of section 864(c)  (Reg. Sec. 1.199A-3(b)(2)(A)).

W-2 wages must be reported on a return filed with the Social Security Administration (Reg. Sec. 1.199A-2(b)(2)(iii)), so I would use the Form W-3 filed by the employer for the number.

Unadjusted basis must be held by and used in the qualified trade or business (Reg. Sec. 1.199A-2(c)(1)(i)).  How hard would it be to determine the cost of the assets used in the U.S. trade or business?  If there are foreign fixed assets, I assume you would already be making the distinction by using ADS for depreciating foreign fixed assets and GDS for depreciating U.S. fixed assets.

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6 minutes ago, EricF said:

Qualified business income must be effectively connected with a U.S. trade or business within the meaning of section 864(c)  (Reg. Sec. 1.199A-3(b)(2)(A)).  So 700k number is good. 

W-2 wages must be reported on a return filed with the Social Security Administration (Reg. Sec. 1.199A-2(b)(2)(iii)), so I would use the Form W-3 filed by the employer for the number.  Yes, I read this, but then it over-inflates the QBI wages,  no?  The 1120S instructions advise attaching a statement with the K-1s detailing how the numbers were calculated and I thought this would help the IRS understand the W-3 total number ($800k) vs. the K-1 number of $280k.  Thoughts?

Unadjusted basis must be held by and used in the qualified trade or business (Reg. Sec. 1.199A-2(c)(1)(i)).  How hard would it be to determine the cost of the assets used in the U.S. trade or business?  If there are foreign fixed assets, I assume you would already be making the distinction by using ADS for depreciating foreign fixed assets and GDS for depreciating U.S. fixed assets.  Some assets are used for both honestly.  Some are used solely for 1 or the other.  It'd be miserable trying to argue/separate them so I thought this was the simplest way.  The ADS/GDS differences never came into play.     

I have created a statement to attach to the K-1 schedule detailing how I determine my numbers.  I hope this is enough of an explanation to the IRS to not prompt an audit.  

 

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W-2 wages:  There is no over-inflation of wages, if all the wages are reported on Form W-2. and no employees are on a foreign payroll.  You are following the method specified by the regulations.

Unadjusted basis:  If assets are being used both in the U.S. trade or business and the foreign trade or business, they are being used in the U.S. trade or business, so I think their cost would be included and not apportioned.  Can the identification of assets be put on the client?  If you are using ADS for assets used outside the U.S. you are overstating depreciation because GDS is required, and the method is straight-line over a longer life.

As I read the 1120S instructions, the statement should be attached if there is more than one trade or business.  I think it is referring to more than one qualified trade or business, so if you don't have that, a statement is not required.  Of course, you can attach anything you want, but I'm just saying it's not required.  The attachment to the K-1 is to help the shareholder, not inform the IRS.

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4 minutes ago, EricF said:

W-2 wages:  There is no over-inflation of wages, if all the wages are reported on Form W-2. and no employees are on a foreign payroll.  You are following the method specified by the regulations.

I take this back.  The amount of wages properly allocable to QBI is the amount taken into account under Regs. Sec. 1.199A-3 (Reg. Sec. 1.199A-2(b)(4) .  So if only 30% of your wages are used to determine QBI, you would show 30% of the W-3 amount.

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3 minutes ago, EricF said:

W-2 wages:  There is no over-inflation of wages, if all the wages are reported on Form W-2. and no employees are on a foreign payroll.  You are following the method specified by the regulations.  Perhaps I'm making this more complicated than it is... (not surprised).  Two of the employees are US citizens, one's a shareholder, both live abroad.  Their job with the company focuses mostly on the international business side.  Given their payroll is mostly used to build the international income and that's excluded from QBI, this is where my concern stemmed from.  

Unadjusted basis:  If assets are being used both in the U.S. trade or business and the foreign trade or business, they are being used in the U.S. trade or business, so I think their cost would be included and not apportioned.  Can the identification of assets be put on the client?  If you are using ADS for assets used outside the U.S. you are overstating depreciation because GDS is required, and the method is straight-line over a longer life.  I see what you're saying.  I'll speak to the client about their asset listing and see if anything specifically is international only.  95% appears to be domestic, but I've got one vehicle I'm eye-balling as possibly needing to be excluded.   

Thank you for all your insight EricF!  Really appreciate it. 

 

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13 minutes ago, EricF said:

I take this back.  The amount of wages properly allocable to QBI is the amount taken into account under Regs. Sec. 1.199A-3 (Reg. Sec. 1.199A-2(b)(4) .  So if only 30% of your wages are used to determine QBI, you would show 30% of the W-3 amount.

Thank you!  This is what I did with the DPAD in previous years so it made sense to follow the same method.  Thanks again EricF.  

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