On September 11, 2025, the U.S. Tax Court decided Savage v. Commissioner, 165 T.C. No. 5, holding that wages disallowed under section 280E do not count as “W-2 wages” for the section 199A limitation.
Shareholders of S corporations operating cannabis businesses claimed section 199A deductions using total W-2 wages reported on Forms W-2.
The IRS limited the wage factor to only the deductible portion after section 280E, and the court agreed with the IRS.
Why It Matters
The ruling ties the section 199A W-2 wage cap to deductible wage expense. For businesses subject to section 280E, the decision can reduce the available 199A deduction even when employees were paid.
Key Facts
Parties: Petitioners Ayla A. Savage and Patricia A. Torres, shareholders of three S corporations.
Businesses: Tru Greenthumb, Inc., and Fillabong, Inc., engaged in cannabis sales and were subject to section 280E. Fillabong and Glass, Inc. was not subject to section 280E.
Years: 2018 and 2019.
Issue: Whether “W-2 wages” under s…
