IRS Issues FAQs on the New Deduction for “Qualified Overtime Compensation” — What Dealerships Need to Know
The “Big Beautiful Bill Act” created a new above-the-line federal income tax deduction for certain overtime compensation, often referred to as the “No Tax on Overtime” deduction. The Internal Revenue Service recently released FAQs clarifying how the deduction works and, more importantly, who qualifies. Because many dealers have asked whether salespeople, parts personnel, and technicians qualify, it is important to examine how the statute interacts with federal and Minnesota wage-and-hour law.
What the New Law Actually Says
The statute allows a deduction equal to the amount of “qualified overtime compensation” received during the taxable year. It defines “qualified overtime compensation” as overtime compensation required under Section 7 of the Fair Labor Standards Act (FLSA) that exceeds the employee’s regular rate. The key limitation is that the overtime must be required under Section 7. The deduction does not apply to all overtime pay; it applies only to overtime that federal law mandates.
Why the FLSA Exemption Matters for Auto Dealerships
Section 7 of the FLSA establishes the general federal rule requiring time-and-one-half pay after 40 hours in a workweek. However, regulations issued by the U.S. Department of Labor specifically exempt dealership salesmen, partsmen, and mechanics from Section 7 overtime requirements. Because federal law does not require overtime for these positions, overtime paid to dealership sales staff, parts personnel, and technicians generally will not qualify for the new deduction. If Section 7 does not require the overtime, the statute does not allow the deduction.
What About Union Technicians or Parts Employees?
I frequently receive questions about union technicians or parts employees whose collective bargaining agreements require overtime pay. However, the statute ties eligibility to overtime required under Section 7—not overtime required by contract. If a collective bargaining agreement requires overtime but the employee remains exempt from Section 7, that overtime is contractual rather than federally mandated. Based on the statutory language and the IRS FAQs, contractual overtime does not create eligibility for the deduction. Accordingly, union technicians and parts personnel who fall within the federal exemption will likely not qualify for the new “No Tax on Overtime” deduction.
How Minnesota Law Fits In
Minnesota’s overtime statute, Minn. Stat. § 177.25, generally requires overtime after 48 hours in a workweek. However, subdivision 3 expressly exempts dealership salesmen, partsmen, and mechanics. As a result, these positions are exempt from statutory overtime under both federal and Minnesota law. Because the new federal deduction hinges specifically on overtime required under Section 7 of the FLSA, Minnesota overtime requirements—or the absence of them—do not independently determine eligibility. The controlling question remains whether federal law requires the overtime.
Who Likely Does Qualify?
The deduction will primarily benefit non-exempt employees who are legally entitled to overtime under Section 7 of the FLSA. This group may include certain office staff, administrative personnel, or hourly support employees who do not fall within a statutory exemption. For these employees, the premium portion of overtime required under federal law may qualify for the deduction.
Key Takeaways for Dealerships
The new deduction is narrower than many headlines suggest. It applies only to overtime required under Section 7 of the FLSA. Because dealership salesmen, partsmen, and mechanics are exempt from Section 7—and also exempt under Minn. Stat. § 177.25, Subd. 3—most overtime paid to those positions will not qualify, even if a collective bargaining agreement provides for overtime pay.
