What is commonly thought of as a single trade or business may be operated across multiple entities for various legal, economic, or other non-tax reasons.
To maximize the Section 199A qualified business income (QBI) deduction of up to 20%, these complex business structures could be forced to reorganize. However, business and non-tax law requirements may prevent some taxpayers from restructuring their operations. New proposed reliance regulations avoid this problem by permitting aggregation of separate trades or businesses that meet specific requirements. Aggregation is elective and not required.
A simple example is a catering business and a restaurant operated separately that share centralized purchasing to obtain volume discounts and a centralized accounting office that performs bookkeeping, tracks and issues statements on receivables, and prepares the payroll for each business. The problem arises because the catering business is treated separately from the restaurant for purposes of applying the limitations on calculation of QBI. However, if the requirements of the proposed reliance regulations are met, the two businesses may be aggregated, and the aggregate is treated as a single trade or business for purposes of applying the limitations on calculation of the QBI.
It is important to note that an individual may aggregate trades or businesses operated directly and the individual’s allocable share of items (QBI, W-2 wages and unadjusted basis immediately after acquisition (UBIA) of qualified property) from trades or businesses operated through relevant pass-through entities (RPEs) (basically, partnerships, S corporations, trusts, or estates). Multiple owners of an RPE may make their own election and don’t have to aggregate in the same manner.
Individuals considering aggregating multiple trades or business should calculate the QBI deduction for both disaggregated and aggregated trades or businesses to determine whether aggregation is beneficial. Since aggregation is optional, the alternative calculations will show which strategy provides the largest deduction.
As is the case with most issues related to the QBI deduction, the requirements for business aggregation are complicated, and they also involve attribution rules. Another downside is the burden of additional record-keeping made necessary by the reporting and disclosure requirements imposed on an aggregated business. Keep in mind that a specified service trade or business (SSTB) (generally, any trade or business involving the performance of services other than engineering or architecture) may not be included in an aggregated group.
The aggregation of multiple trades or businesses is a tool to maximize the QBI deduction. A full understanding of Section 199A and the proposed reliance regulations—including calculation of QBI and the phase-in threshold—is necessary to make the determination whether to aggregate. Practitioners will find coverage of the QBI deduction and the comprehensive proposed reliance regulations in the Tax Advisors Planning System (Title 1, Choice of Entity, Ƥ13.11 et seq.).
To read more about the impact of Section 199A Qualified Business Income Deduction, please check out the following blog posts: