Question

Aggregating multiple businesses for the QBI deduction cannot include

Answer 1

Hi there,

Here's my answer to the question asked.

QBI Deduction and Aggregation of multiple businesses :

It’s not unusual for small business owners to operate more than one business. The proposed regs include rules allowing an individual to aggregate multiple businesses that are owned and operated as part of a larger, integrated business for purposes of the W-2 wages and UBIA of qualified property limitations, thereby maximizing the deduction. The final regs retain these rules with some modifications.

For example, the proposed rules allow a taxpayer to aggregate trades or businesses based on a 50% ownership test, which must be maintained for a majority of the taxable year. The final regulations clarify that the majority of the taxable year must include the last day of the taxable year.

The final regs also allow a “relevant pass-through entity” such as a partnership or S corporation to aggregate businesses it operates directly or through lower-tier pass-through entities to calculate its QBI deduction, assuming it meets the ownership test and other tests. (The proposed regs allow these entities to aggregate only at the individual-owner level.) Where aggregation is chosen, the entity and its owners must report the combined QBI, wages and UBIA of qualified property figures.

A taxpayer who doesn’t aggregate in one year can still choose to do so in a future year. Once aggregation is chosen, though, the taxpayer must continue to aggregate in future years unless there’s a significant change in circumstances.

The final regs generally don’t allow an initial aggregation of businesses to be done on an amended return, but the IRS recognizes that many taxpayers may be unaware of the aggregation rules when filing their 2018 tax returns. Therefore, it will permit taxpayers to make initial aggregations on amended returns for 2018.

Aggregating businesses can allow a taxpayer with high taxable income to claim a higher QBI deduction when the limitations based on W-2 wages and the UBIA of qualified property would otherwise prevent a larger deduction.

Taxpayers can potentially aggregate qualified businesses that are operated directly, such as through a sole proprietorship or a single-member limited liability company (LLC). The taxpayer must calculate the QBI, W-2 wages and UBIA of qualified property for each business and then aggregate those amounts to calculate QBI for the aggregated businesses and apply the QBI deduction limitations for the aggregated businesses.

Taxpayers can also potentially aggregate businesses that are operated via pass-through entities, such as S-corporations, partnerships or LLCs. All owners of pass-through entities need not aggregate in the same fashion.

5 aggregation requirements ;

Remember that the aggregation privilege isn’t automatic. In general, a taxpayer can aggregate businesses only if the five aggregation requirements listed below are satisfied:

1. The same person or group of persons directly or indirectly owns 50% or more of each business to be aggregated. For businesses operated by an S-corporation, that means owning 50% or more of the issued and outstanding shares. For businesses operated by partnerships (including LLCs treated as partnerships for tax purposes), that means owning 50% or more of the capital or profits interests. For purposes of applying the 50% ownership rule, a taxpayer is also considered to own the interest in each business that’s owned directly or indirectly by his or her spouse, children, grandchildren or parents.
2. The preceding 50% ownership picture exists for a majority of the tax year in which the items for each business to be aggregated are included in the taxpayer’s income.
3. All the tax items attributable to each business to be aggregated are reported on returns with the same tax year end.
4. None of the businesses to be aggregated is a specified service business. The specified service business disallowance rule is phased in over the same taxable income ranges that apply to the limitations based on W-2 wages and the UBIA of qualified property.
5. The businesses to be aggregated must satisfy at least two of the following three requirements:
   • The businesses provide products and services that are the same or customarily offered together (for example, a gas station and a car wash).
   • The businesses share facilities or significant centralized business elements (such as personnel, accounting, legal, manufacturing, purchasing, human resources or information technology).
   • The businesses are operated in coordination with, or in reliance on, each other. (For example, they have supply chain interdependencies.)

Options for aggregating :

A taxpayer can choose to aggregate some businesses for which aggregation is allowed while not aggregating others for which aggregation isn’t.

How a taxpayer groups or doesn’t group businesses for purposes of applying the passive activity loss (PAL) rules doesn’t affect how the taxpayer can aggregate or not aggregate businesses for purposes of applying the QBI deduction rules. In other words, PAL groupings or non-groupings are irrelevant for purposes of the QBI deduction rules.