Thank you, again I appreciate the time and response. Possibly I am trying too hard, but often our job is about finding the nuances in the tax law to benefit our clients. Personally I don’t like making mistakes and am very conservative in the application of tax regulations. But 199A was broadly written so taxpayers could take the QBI, with even broader definitions being adopted to ensure rental real estate would be included. Follow Itonewbie’s lead:

Regarding the preamble to the proposed regulations, Par. A. W-2 wages attributable to a trade or business, page 18:

Excerpts (as found in order written):

1. Line 5 “…amounts paid to workers who receive Forms W-2 from third party payors (such as professional employer organizations, certified professional employer organizations, or agents under section 3504) that pay wages to workers on behalf of their clients [omitted], may be included in the W-2 wages of the clients of third party payors.”

2. Line 11 “, …the Form W-2 must be for employment by the taxpayer [or client].”

3. Line 14 “…since employees of the taxpayer are defined in the regulations as including only common law employees of the taxpayer…”

4. Line 20 “…a person may take into account any W-2 wages paid by another person and reported by the other person on Forms W-2 [omitted], providing that the W-2 wages were paid to common law employees…”

I believe this text supports an intent to include the ability of a centralized management company to allocate wages to the client as long as Item 2) and 3) above are met.

When the management company and client is a related party, it elevates the conversation to 199A-2(b)(3) Allocation of wages to trades or businesses, where “each individual or RPE that directly conducts more than one trade or business MUST allocate those wages among its various trades or businesses”

The Final Regulations (199A-2(b)(2)(ii), page 180) in line 10 of P.(ii) states: Third Party Payors “ can include, but are not limited to [CPEO Sec7705, Statutory Employers Sec3401, Agents Sec 3504]”.

If a Third Party Payor was limited to just these three types of payors, then why use language that states “such as” or “can include, but are not limited to”?  It appears these three payors are the ONLY types of IRS third party payors that assume employment tax liability (a PSP or RA does not – see https://www.irs.gov/businesses/small-businesses-self-employed/third-party-arrangement-chart ). Unless there are other types of third party payors that I cannot find, the law must then be indicating that ANY reasonable 3rd party payor arrangement that otherwise meets the “works for client and common law requirements” noted in 2) Line 11 and 3) Line 14 above, can be allocated.

Finally, the IRS acknowledge this broad definition could be subject to abuse, so both the proposed and final regulations put a clarifying statement found in 199A-2(b)(5): Non-duplication rule “an amount cannot be treated as W-2 wages by more than one trade or business”. I suggest here the key is a written agreement between the management company and client, which for consistency must be followed each year after.

Concluding: It seems as tax preparers we have the obligation to identify tax positions supported by authority. 199A uses very specific words which clearly indicate the ability to allocate wages form other than a CPEO Sec7705, Statutory Employers Sec3401, Agents Sec 3504. Unless my analysis is flawed somewhere, should we not rally behind the law and provide this tool to our clients?

Any opinions / thoughts from other Tax Law / Regulation / Employee Law Experts?  Sometimes it takes a village……