The Tax Cuts and Jobs Act, enacted in December 2017, made sweeping changes to the United States tax system. One major change is the new deduction for Qualified Business Income (QBI). The QBI deduction allows taxpayers to deduct 20% of the income they make from pass-through trades or businesses (S Corporations, Partnerships, and Trusts). This 20% deduction is fully available to eligible individuals who make less than $157,500 ($315,000 for married filing jointly). For individuals who make more, they are subject to wage and capital limitations (for a full discussion of these limitations, see our previous blog here).
To lessen the impact of these limitations, grouping or aggregating multiple businesses together has been suggested. The benefit would come from the ability to mix the W-2 wage and capital limitations among multiple entities, maximizing the deduction.
For example, an individual could own multiple business entities. If each of them make money, but only one has almost all of the wages and capital invested in it, and the others have little or none, then the individual’s QBI deduction could be severely limited. If, however, the individual could aggregate the wages, capital, and income, they could potentially maximize their QBI deduction. This could motivate taxpayers to go through extensive restructuring just for tax reasons.
To avoid this result, the Treasury Department proposed regulations which allows taxpayers to aggregate trades or businesses. Importantly, Treasury is explicit that the aggregation rules under the QBI deduction are going to be different than for those under the Passive Activity rules. Instead, Treasury outlines a different set of rules. An individual may aggregate only if the individual can demonstrate the following:
- Each trade or business must itself be a trade or business, as defined in the rules;
- The same person or group of people must directly or indirectly own a majority in each of the businesses;
- None of the aggregated businesses can be one of the services specifically excluded from the QBI deduction (including lawyers, accountants, and doctors); and
- The individual must demonstrate that the businesses are in fact part of a larger, integrated trade or business (by having the same products and services, shared facilities, and/or that they operate in coordination with each other).
Grouping provides a huge opportunity for people with multiple businesses. This prevents the headaches of re-structuring just to take advantage of the QBI deduction. However, some planning is still required to understand and meet the aggregation rules.
If you have any questions about these new aggregation rules and how they may affect your business, please contact a member of our team here or call 513-241-8313.