If you’re eligible to claim the QBI deduction and you’re involved with multiple businesses, you may want to consider aggregating – or combining – them on your tax return. It might increase your deduction and reduce your tax bill. But, there are rules that come with aggregation.
In January 2019, the IRS released its final regulations for this deduction which define how and when business owners can aggregate their businesses.
We outline the criteria and requirements your business has to meet in order to aggregate. And, if you do aggregate, we explain the rules you must follow in the subsequent years. Finally, we close with a couple of examples that show how aggregating your businesses can save you money. Let’s dive in!
Is aggregating required?
No! It’s optional. If you choose to combine some, all, or none of your businesses, it doesn’t prevent you from claiming the deduction on your other businesses that qualify for the deduction too.
How do I know if I can aggregate my businesses?
Let’s start here. You must meet all of the following criteria.
1. The businesses you want to aggregate are qualified trades or businesses, not specified service trades or businesses.
2. You, or the same group of people, own 50% of each trade or business – either directly or by attribution. The group of owners can include C corporations.
3. You, or the same group of people, maintain at least 50% of the ownership in each business for the majority of the taxable year. Including the last day of the taxable year.
4. You report all items that can be attributed to each of the aggregated businesses on your tax returns for the same taxable year. If you have trades or businesses with different taxable years, you can’t aggregate them.
Then, satisfy two of these requirements.
If you meet all four of those rules, you can move to this next step. You must prove your “businesses are part of a larger, integrated trade or business“. In order to do this, you must meet two of three requirements. These are:
1. The businesses offer products, services, or property that are the same or are usually provided together.
- Restaurant & food truck
- Gas station & car wash
2. The businesses share facilities or significant centralized business elements.
- Common staff
- Human resources
- IT resources
3. The businesses operate in coordination with each other or rely on other businesses in the aggregated group.
An example includes:
- Supply chains
How and when do I aggregate?
You elect to aggregate businesses on your personal tax return. Pay attention to these rules.
For the 2018 tax year, you can choose to aggregate and make your initial aggregations on your amended return. YOU CAN ONLY DO THIS FOR 2018.
Starting in 2019, you can only aggregate businesses on your initial tax return. If you don’t aggregate when you originally file your return, you can’t change it on your amended return.
If you do aggregate, you have to stick with it and keep aggregating in the following years. You’re able to stop if you experience a material change in circumstances that would justify a change. A material change can include a change in ownership or changes the business makes to the products or services it offers.
You don’t have to aggregate in 2019 either. You can wait until later years. But, you can’t ever go back and amend tax returns in past years when you didn’t aggregate.
When is it good to aggregate?
Generally, it’s beneficial to aggregate your businesses when you’re subject to the wages and property limitation.
When is it bad?
Aggregating may not be beneficial when you don’t have to apply the wages and/or property limitation.
However, you should always do the math to determine whether aggregating – or not – is the most beneficial option.
Let’s go through a couple of examples to examine the benefits of aggregating or not aggregating. This is an example from the IRS’ final regulations – modeled for clarity. Here are the facts.
Fran is an unmarried individual. As a sole proprietor, she owns 100% of three businesses. None of them have qualified property.
She’s also employed by an unrelated company and has $750,000 in income from it.
- Business A has $1 million in QBI. It pays $500,000 of W-2 wages.
- Business B has $1 million in QBI. It pays no W-2 wages.
- Business C has $2,000 in QBI. It pays $500,000 of W-2 wages.
Fran’s total QBI is $2,002,000. The W-2 wages total is $1 million.
Her taxable income is $2,722,000 after she claims deductions that are unrelated to Businesses A-C.
Example 1: Fran chooses to aggregate
Fran chooses to aggregate all three of her business. They meet all the requirements we outlined above.
Because Fran’s taxable income is more than the threshold amount ($157,500), her QBI is subject to the W-2 wage and UBIA of qualified property limitations.
The UBIA of qualified property limitation doesn’t apply because none of the businesses hold qualified property. And, because Fran chose to aggregate, the limitations apply on a combined basis.
So, Fran must determine her limitation by calculating 20% of QBI and 50% of W-2 wages. She must claim whichever of these amounts is the lowest.
- 20% of total aggregated QBI → $2,002,000 x .2 = $400,400
- 50% of aggregated W-2 wages → $1,000,000 x .5 = $500,000
The 20% of aggregated QBI is the lower amount, so Fran’s QBI deduction is $400,400.
Example 2: Fran chooses not to aggregate
In this example, Fran decides not to aggregate her businesses. To get her total deduction, she has to calculate the deduction for each of her businesses and apply the W-2 wage limitation.
She must take the lower deduction for each business, then add them together to get her final deduction amount.
- 20% of Business A’s QBI → $1,000,000 x .2 = $200,000
- 50% of Business A’s W-2 wages → $500,000 x .5 = $250,000
Fran’s deduction for Business A is $200,000.
- 20% of Business B’s QBI → $1,000,000 x .2 = $200,000
- 50% of Business B’s W-2 wages → $0 x .5 = $0
Fran’s deduction for Business B is $0.
- 20% of Business C’s QBI → $2,000 x .2 = $400
- 50% of Business C’s W-2 wages → $500,000 x .5 = $250,000
Fran’s deduction for Business C is $400.
Finally, Fran adds the deductions for Business A, B, and C to get her final deduction amount. $200,000 + $0 + $400 = $200,400. Fran’s QBI deduction is $200,400.
When Fran aggregates, her total deduction is $400,400. When she doesn’t, her total deduction is $200,400. It’s more beneficial – $200,000 more! – for Fran to aggregate her businesses. She loses a substantial amount when she doesn’t aggregate.
Most elements of the QBI or Section 199a deduction are complicated. Aggregation is no exception. We suggest you work with a CPA or tax professional to help you figure out whether you can claim this deduction and if it’s beneficial to aggregate.
It’s especially important to get it right the first time because the IRS expects you to continue aggregating after you choose to do so. Don’t be like Fran in example 2.
Get it right the first time, claim the bigger deduction, and save more money!
Have questions about aggregating your businesses? Let’s talk!