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Aggregating business entities for the QBI deduction

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The qualified business income (QBI) deduction, introduced in the Tax Cuts and Jobs Act with Internal Revenue Code Sec. 199A, allows a deduction of up to 20% of income earned from a business conducted via a sole proprietorship as an owner of a pass-through entity. However, once a minimum taxable income threshold has been exceeded on the tax return ($163,300 single filers/$326,600 joint filers for 2020), limitations begin to phase in that may reduce or eliminate the allowable deduction.

These limitations are:

  • Limitations for specified service trades or businesses (SSTBs).
  • The W-2 wage or unadjusted basis immediately after acquisition (UBIA) limit, which limits the QBI deduction to the larger of a) 50% of W-2 wages paid by the qualified business during the tax year or b) 25% of W-2 wages paid, plus 2.5% of the UBIA of property held at the end of the tax year and used in the qualified business.

The criteria for the SSTB and wage/UBIA limitations are determined at the level of the qualified business rather than at the taxpayer level. In other words, multiple businesses on a single tax return may be subject to different limitations for QBI purposes. Accordingly, Sec. 199A prescribes that computations for figuring the QBI deduction must be performed separately for each qualified trade or business.

Although SSTBs must always be reported as separate businesses, the taxpayer may elect to aggregate multiple non-SSTB trades or businesses if certain requirements are met. In this case, the qualified business income, W-2 wages, and UBIA will be computed and reported together at the level of the aggregation. In addition to excluding SSTBs, the other requirements for aggregation, described in detail in Regulation 1.199A-4, are as follows:

  • Each of the trades or businesses to be aggregated must meet all other requirements to qualify for the qualified business income deduction on its own.
  • With the common control requirement, the same person or group of persons must directly or indirectly own 50% or more interest in each business for the majority of the taxable year.
  • Business income from the entities to be aggregated must be reported in the same taxable year on the same tax return.
  • Businesses to be aggregated must demonstrate a level of business integration by satisfying at least two out of three of the following:
    • The businesses provide products, services, and property that are the same, such as restaurants and food trucks, or products and services that are customarily provided together, such as gas stations and car washes.
    • The businesses share facilities or centralized business elements; for example, personnel, human resources and accounting functions.
    • The businesses are operated in coordination with, or reliance on, other businesses in the aggregated group, such as supply chain dependencies.
  • The aggregation must be disclosed every year on an attached statement to the return (provided in Form 8995-A, Schedule B).
  • Once an aggregation has been formed, it must remain consistent from year to year and may not be disaggregated unless there is a significant change in facts and circumstances.

Note that a pass-through may choose to aggregate multiple businesses at the entity level and report information to owners with respect to the aggregation, which K-1 recipients may not disaggregate on their personal tax return. A business reported on a K-1 may also be aggregated at the owner level with any other business on the owner’s tax return, assuming all other criteria are met to permit aggregation.

To aggregate or not to aggregate?

If available based on the above requirements, the benefits of aggregation may be twofold. First, in cases where a taxpayer has many qualified businesses, it may be less onerous to compute and report qualified business income, W-2 wages, and UBIA in the aggregate compared to doing so multiple times for separate entities. Second, and more importantly, a larger QBI deduction may result in certain cases when businesses are aggregated. This possibility is illustrated in the example below:

Business 1 Business 2 Aggregated
1) QBI $60,000 $100,000 $160,000
2) W-2 wages $40,000 $10,000 $50,000
3) UBIA $0 $80,000 $80,000
4) 50% of wages limit $20,000 $5,000 $25,000
5) 25% of wages + 2.5% UBIA limit $10,000 $4,500 $14,500
6) 20% of QBI $12,000 $20,000 $32,000
7) Greater of 4 or 5 $20,000 $5,000 $25,000
8) QBI deduction (lesser of 6 or 7) $12,000 $5,000 $25,000


In this specific case, excess wages from Business 1 are allowed to be used toward Business 2 when aggregated, resulting in a larger total QBI deduction compared to when the two businesses are kept separate.

However, we must avoid painting too rosy a picture when it comes to aggregation, since, depending on the facts and circumstances, it is also possible for aggregation to reduce the QBI deduction, as seen in the following example:

Business 1 Business 2 Aggregated
1) QBI $100,000 $100,000 $200,000
2) W-2 wages $40,000 $0 $40,000
3) UBIA $0 $800,000 $800,000
4) 50% of wages limit $20,000 $0 $20,000
5) 25% of wages + 2.5% UBIA limit $10,000 $20,000 $30,000
6) 20% of QBI $20,000 $20,000 $40,000
7) Greater of 4 or 5 $20,000 $20,000 $30,000
8) QBI deduction (lesser of 6 or 7) $20,000 $20,000 $30,000


In this case, aggregating the two businesses leads to a smaller QBI deduction than the combined deduction from keeping them separate, because the two businesses have very different profiles of UBIA versus wages. In this case, the aggregated group uses the combined wage/UBIA limit, which leads to a suboptimal outcome since Business 1 would have had a higher limit using only W-2 wages.

Final thoughts

We have seen that in some cases, aggregation can be a very useful tool, but in others it can lead to a lower QBI deduction. Because of this double-edged sword, it is always important to fully understand the nature and circumstances of each client’s individual business situation, and work with them carefully to make an informed decision regarding the aggregation election. Also, remember that unless extenuating circumstances occur, an aggregation is permanent as long as Sec. 199A is in effect. Thus, even if aggregation looks favorable in an initial comparison, it is important to evaluate whether business characteristics affecting the computations of wage/UBIA limits are more likely than not to remain stable over the years before making this choice.


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