This is Part 5 of our series on Section 199A, the qualified business income deduction, or "QBI."
We've been running a series for business owners on the 199A deduction — most people know it as the QBI deduction. If you missed any of them, here is what we covered:
We were getting some replies from our Builders. Laura, I own more than one company. Which one does this apply to?
All of them. And that is the problem. This is where QBI aggregation comes in. This is not simple stuff. But grab a cup of coffee and let's break it apart.
Ray's primary business creates specialty packaging. He has about $12 million in sales.
But Ray got smart and created two companies. The manufacturing company runs the plant and has sixty people on payroll. A second company owns the building and the machines, and rents them to the first one. That's a normal way to set things up, and he had a good attorney. So far so good.
Now we get to QBI. The deduction gets figured company by company. Not on you. On each business. And this has to be figured separately.
So the manufacturing company has all the paychecks and, after wages and materials, not a huge amount of profit left. Remember from a few weeks ago that your deduction can't be bigger than about half of what the business pays out in paychecks. Ray's manufacturing company is nowhere near that ceiling. It has room it isn't using.
The company that owns the building has almost no payroll. That business has one part-time bookkeeper. That's where a lot of the profit sits, because the rent goes there.
Two halves of the same business. One has the paychecks. The other has the profit. And they can't lend each other what they have. Sorry, no lending.
That's the whole story, and I've now seen it three times this year. Two things can fix it.
First, paychecks aren't the only test. There's a second way to figure that ceiling, and it counts what a business owns and still uses — the building, the equipment, things you bought and still have. A company with a lot on the floor and almost zero humans on payroll can come out far better under that test than under the paycheck one.
Both get run, and you get whichever is better for you. But only if the person preparing the return knows the property is there and knows to look.
Second, and bigger: separate companies can sometimes be treated as one for this deduction. That's QBI aggregation. Combine them, and the paychecks in one cover the profit in the other.
That's allowed, and it's ordinary, and there are conditions. The same people have to own most of each company. None of them can be the kind of business I described in the last post, where what you're selling is the skill and reputation of the people inside it. And they have to operate as one business — shared customers, shared staff or space, one depending on the other — not just happen to have the same owner.
It's also a choice you have to make and report. Nobody makes it for you, and it's not automatic. Once you make the aggregation election, you're generally living with it in the years after, so it isn't something to decide in a hurry in March.
OK. That is a lot, right? Now let's zoom out.
For four weeks I've been writing about a line, and about who's over it. If your business is doing several million dollars a year, you're over it. Every year. End of story.
Which means none of your deduction is decided by whether you cross a line. All of it is decided by how your companies are arranged, where your payroll sits, and what got elected on a return.
That's not a filing problem. It's a structure problem, and structure gets decided long before anybody opens a tax return. This is strategy, my business-owning friends.
Please consider these questions, and bring them to your CPA:
If the answer to any of those is a pause…
QBI aggregation is an election under Section 199A that lets an owner treat two or more separately held businesses as a single business for purposes of the qualified business income deduction. Once aggregated, the W-2 wages and qualified property of all the businesses are combined, so payroll in one company can support the profit in another.
Per business. Each trade or business computes its own qualified business income, W-2 wages, and qualified property, and the limitations apply company by company. That's why one profitable entity with no payroll can lose its deduction even when a sister company has plenty of wages — unless the businesses are aggregated.
The same person or group must own 50% or more of each business, none of the businesses can be a specified service trade or business (SSTB), all must share the same tax year, and they must operate as an integrated whole — for example, sharing customers, staff, facilities, or one business depending on the other. The election must be made and disclosed on the return.
Above the income threshold, the deduction is limited to the greater of 50% of W-2 wages, or 25% of W-2 wages plus 2.5% of the unadjusted basis of qualified property the business owns and still uses. Businesses with significant buildings or equipment but little payroll can come out far better under the property-based test.
The aggregation election is made on a timely filed return and generally must be maintained in later years once made. It is not automatic and shouldn't be decided in a rush during filing season — it's a planning decision about how your companies are structured.
Often, yes. A self-rental to a commonly controlled operating business is generally treated as a trade or business for Section 199A, and it's a common candidate for aggregation with the operating company so the operating company's payroll can cover the rental entity's profit.
Disclaimer: This article is for general educational purposes only and does not constitute tax, legal, or accounting advice. The examples are composites with rounded numbers. Whether QBI aggregation or the property-based limitation applies to you depends on your specific facts, ownership, and operations. Please consult a qualified tax professional before making an aggregation election or restructuring your businesses.
This is Part 5 of the series. Start at the beginning:
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