There has been a great deal of ‘buzz’ lately over the Qualified Business Income Deduction (QBID). The QBID was recently made available to pass through business owners under the Tax Cuts and Jobs Act that the President signed into law in 2017. Under new Internal Revenue Code Section 199A, pass through business owners are eligible to take up to a 20% deduction against their income from a qualified business. However, there is a risk that if the business is not compliant or late in filing its W-2 wage statements, its owners could lose their entire deduction for the year. While reasonable cause penalty abatement is available for late or incorrectly filed W-2 wage statements, there is no such exception in new Section 199A. This makes it an all or nothing proposition to qualify to take the QBID.

Tax practitioners and business owners have begun reviewing their organizations to determine the most advantageous structure in the context of this new law. Depending on the field of the underlying business and the total income of the business owner, the 20% deduction may be reduced or eliminated entirely. This is where the W-2 wage statements come into play. If a business owner is not engaged in a specified service business(1), and his/her total adjusted income is greater than $415,000 for a married taxpayer or $207,500 for a single taxpayer (the threshold amount), then the 20% deduction is limited to the greater of: (a) 50% of W-2 wages or (b) 25% of W-2 wages plus 2.5% of certain capital assets held by the qualified business. This means that for higher income business owners, if the business has zero W-2 wages and no capital assets, then the QBID will be zero. A high-income business owner will want to structure his/her business to pay sufficient wages and/or hold capital assets that will qualify to take the QBID.

Many practitioners are even recommending that sole proprietors and partnerships with few or no employees convert to be taxed as S corporations in order to pay their owners W-2 wages and thus be eligible to take the QBID. The catch is that the wages paid to the employees of the qualified business must be “properly included in a return filed with the Social Security Administration on or before the 60th day after the due date (including extensions) for such return.”(2) This means that if the business’s W-2 statements are not filed correctly, or are filed more than 60 days late, the owners will not qualify for the QBID for the year the wages were paid, if their income is over the threshold amount.

This trap for the unwary could lead to dire consequences for business owners who are relying on the W-2 limitation to qualify them to take the QBID. Furthermore, this loss of the QBID is in addition to the stiff penalties that may be imposed for non-compliance and late filing of the W-2 wage statements.(3) Practitioners have been seeing more and more employers who have missed these filing deadlines and need assistance in requesting penalty abatements. Although reasonable cause penalty abatement is available for the failure to file and failure to deposit penalties, there is no relief available under Code Section 199A for business owners who mistakenly do not file the wage statements on time and need to qualify for the QBID using the W-2 limitation.

High-income pass through business owners should set up procedures with multiple safeguards to ensure they do not miss the W-2 wage statement filing deadline. And if they do, it’s important that it is corrected within 60 days of the due date. Business owners should set up internal procedures and also coordinate with their tax counsel to make sure they are in full compliance with this requirement for Code Section 199A.

Alexis Kim is an attorney at Walter | Haverfield who focuses her practice on federal, state and local tax planning as well as estate and succession planning. She can be reached at or at 216-619-7859.


(1) Any business involving the performance of services in the fields of health, law, consulting, athletics, financial services, brokerage services, or any trade or business where the principal asset of such trade or business is the reputation or skill of one or more of its employees or owners, or which involves the performance of services that consist of investing and investment management.

(2) USC 199A(b)(4)(C).

(3) Failure to file and failure to deposit penalties are imposed on employers who do not timely file wage statements and/or pay the withheld taxes. See 26 USC 6651 and 6656.