Section 199A deduction aggregation rules

Your Guide to State, Local, Federal, Estate + International Taxation

Section 199A, aggregation, tax reformThe proposed regulation Section 1.199A-4 contains the information on aggregation rules between trades or businesses that can be grouped when applying the Section 199A rules. Take note: the aggregation rules are not related to the grouping rules under Section 469 regarding passive loss provision. The overall goal with the regulation is to execute a duty of consistency that once multiple trades or businesses are aggregated as one trade or business under Section 199A, then taxpayers can consistently report the one group.

Remember, this proposed regulation can be elected by a taxpayer and is not required. When the aggregation is elected, you must determine the Section 199A deduction for the business through the combined qualified business income, W-2 wages and unadjusted basis immediately after acquisition (UBIA) of qualified property.

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The first item to look at is if the business can be considered for aggregation – does it raise the level of a trade or business? This regulation DOES NOT apply to specialized service trades or businesses, such as accounting firms, law firms, performing arts and athletics.

Next, the business must be under common control. What does this mean exactly? Well, the same person or group of people, must own more than 50% of either the capital/profits interest in the partnership or outstanding stock in an S Corporation. The businesses also must be on the same tax year.

After the requirements above are met, to aggregate, the businesses must satisfy two of these three factors:

  1. The businesses share facilities or share significant centralized business elements – items like human resources, information technology resources or manufacturing.
  2. The businesses must provide products and services that are the same or customarily together.
  3. The businesses are operated in coordination with, or rely on, one or more of the businesses in the aggregated group.

Section 199A: QBI implications

Key items to remember:

  • Election rules:
    • After electing to aggregate two or more businesses, they must be reported consistently in all subsequent tax years.
    • A taxpayer can add a newly formed or acquired business to an aggregation group only if all the requirements are met.
  • Disclosure rules:
    • For each year, you must attach a statement for identifying each trade or business in the aggregation group, including names, EIN and description of each business.
    • Necessary information must be provided identifying any newly acquired, formed or disposed of businesses inside the aggregation group.

Now, your question may be whether to aggregate or separate your businesses. Keep in mind, the deduction is limited to the greater of 50% of a taxpayer’s share of W-2 wages or 25% of the share of W-2 wages plus 2.5% of UBIA.

Make sure the election is right for you and feel free to contact your CPA at Henry+Horne with any questions!

Meghan Metzger