How to know if aggregating your businesses for Section 199A (QBI Deduction) will increase your benefit.
In 2017, the Tax Cuts and Jobs Act (TCJA) created a new deduction for qualified business income (QBI). This is available to the owners of pass-through entities and sole proprietorships, and provides a 20% deduction for income derived from the qualified business (subject to limitations depending on income level and business industry). One of the most challenging aspects of the deduction is determining when a taxpayer is able to aggregate multiple businesses for Section 199A purposes and, most importantly, when it is beneficial to do so.
The income levels that trigger the limitations start at $157,500 for single filers ($315,000 for married filing joint). This is when alternative calculations involving wages paid and capital limitations are used to determine the overall deduction, and also when the decision to aggregate multiple businesses can potentially create more tax savings than calculating each separately.
What is the Criteria?
The first step is to determine if the businesses can be aggregated. To do this, all five of the below criteria must be met:
- The same person or group of persons own 50% or more of each trade or business to be aggregated
- The above ownership exists for the majority of the year, including the last day of the tax year
- All items to be aggregated are reported on returns with the same tax year (no short years)
- None of the trade or businesses is a specified service trade or business (SSTB)
- At least two of the following three factors are met
- the provided products, property, or services are the same or customarily offered together
- The trades or businesses share facilities or share significant centralized business elements (personnel, accounting, legal, manufacturing, purchasing, HR, or IT)
- Each trade or business operates in coordination with, or reliance upon, one or more of the other businesses in the aggregated group
Should You Aggregate?
After determining if the entities can aggregate, the second step is to determine if they should. By aggregating the entities, the QBI calculation combines the wages and capital unadjusted basis immediately after acquisition (UBIA), which can lead to higher base amounts and a higher deduction. When each entity is separate, some wages paid and capital value can be lost if the income for that particular entity is low. The aggregation election would allow for those amounts to be applied to the total of all business activities rather than getting lost.
However, aggregation is not always beneficial to the taxpayer, so making the election may cause a lower deduction in some cases. The evaluation for each scenario is unique, and careful consideration needs to be taken for the long-term situations of all taxpayers involved. Although an annual election is required disclosing the entities being aggregated, the election is irrevocable with the exception of material change in circumstances. New entities may be added to the existing group, but none can be removed.