Requirements

The aggregation privilege isn’t automatic. In general, an individual can aggregate businesses only if the following five requirements are satisfied:

1. The same individual or group of individuals directly or indirectly owns 50% or more of each business to be aggregated.
2. The preceding 50% ownership picture exists for a majority of the tax year in which the tax items for each business to be aggregated are included in the individual’s income.
3. All the tax items attributable to each business to be aggregated are reported on tax returns with the same tax year end.
4. None of the businesses is a specified service business. A special QBI deduction disallowance rule applies to income from specified service businesses, and they cannot be aggregated with any other businesses to minimize or avoid the rule. Your tax adviser can explain exactly what constitutes a specified service business for purposes of the disallowance rule.
5. The businesses to be aggregated must satisfy at least two of these requirements to demonstrate that they’re part of a larger integrated business:
   • • • The businesses provide products and services that are the same or customarily offered together (for example, a gas station and a minimart).
       • The businesses share facilities or significant centralized business elements (such as purchasing, accounting, IT and personnel).
       • The businesses are operated in coordination with or in reliance upon each other. (For example, they have supply chain interdependencies.)

An individual can choose to aggregate some businesses for which aggregation is allowed while not aggregating others for which aggregation would be allowed.

Important note: An individual’s decision about combining businesses for purposes of applying other tax law provisions — such as the passive loss
rules — does not affect his or her decision to aggregate businesses for purposes of applying the QBI deduction rules (and vice versa).

Example 1: Income Above the Applicable Threshold

How can aggregation be advantageous? Basically, aggregation can sometimes result in higher QBI deductions for higher-income taxpayers who are affected by the deduction limitations based on
W-2 wages and the UBIA of qualified property. For instance, the aggregation rules would benefit a higher-income individual who owns 1) an interest in one business with substantial QBI but no W-2 wages (or UBIA of qualified assets), and 2) an interest in another business with minimal QBI but significant W-2 wages (or UBIA of qualified assets). Aggregating these two businesses could result in a larger QBI deduction than if they were treated separately.

For example, John is an unmarried calendar-year taxpayer and small business owner with taxable income of $300,000 before any QBI deduction. Since his taxable income exceeds $207,500, he is fully subject to the QBI deduction limitations based on W-2 wages and the UBIA of qualified property.

John owns and operates a catering family business and a restaurant business through separate single-member LLCs that are treated as sole proprietorships for tax purposes. The two operations share centralized purchasing and human resources functions, which are performed by John. He also maintains a website and does print advertising for both businesses. The restaurant kitchen is used to prepare food for the catering business, but the catering business employs its own staff and leases equipment and trucks that aren’t used by the restaurant.

The catering business has QBI of $300,000 but no W-2 wages because all the work is done by independent contractors that John hires on a job-by-job basis. The restaurant business has QBI of only $50,000, but it has regular employees who are paid $200,000 of W-2 wages for the year.

If John keeps the two businesses separate for QBI deduction purposes, his deduction from the catering business is zero (50% of no W-2 wages). His QBI deduction from the restaurant is $10,000 (20% x $50,000). So, his total QBI deduction for the year is only $10,000.

However, if John aggregates the two businesses, his aggregated QBI would be $350,000 ($300,000 + $50,000) and his aggregated W-2 wages would be $200,000 ($0 + $200,000). So, his aggregated QBI deduction is equal to the lesser of:

• $70,000 (20% x $350,000 of QBI), or
• $100,000 (50% x $200,000 of W-2 wages).

Under the facts in this example, John is allowed to aggregate the businesses. Therefore, his allowable QBI deduction is $70,000.

Example 2: Income below the Applicable Threshold

When an individual’s taxable income is below the threshold for the QBI deduction limitations based on W-2 wages and the UBIA of qualified property, there’s no advantage to aggregating businesses.

For example, let’s assume the same facts, except now John’s taxable income before any QBI deduction is only $150,000. So, he’s unaffected by the QBI deduction limitations, and there’s no advantage to aggregating the businesses.

His QBI deduction is simply computed as the sum of 20% of QBI from the two businesses. The deduction from the catering business is $60,000 (20% x $300,000), and the deduction from the restaurant business is $10,000 (20% x $50,000) for a total of $70,000.

Is Aggregation Right for You?

The proposed QBI deduction regulations are lengthy and complex. This article only covers one specific issue, and many details have necessarily been omitted. Your PDR tax advisor can sort through the regulations to help you maximize the QBI deduction based on your specific circumstances.