8595 / When can groups of pass-through entities that are under common control aggregate wages and qualified business property for purposes of calculating the qualified business income deduction?

Under the Section 199A rules, businesses may be aggregated if the following specific requirements are satisfied: |

1. The same person or group of persons owns, directly or indirectly, 50 percent or more of each business (family attribution rules apply to aggregate interests owned by spouses, children, grandchildren and parents²) for the majority of the tax year;

Planning Point: The individual who chooses to aggregate does not have to own 50 percent or more of each business, so long as the ownership requirement is met by another person or group of persons.

Example: Celia owns 60 percent of three partnerships, and Larry owns 5 percent of each of those three partnerships. Leslie owns 10 percent of two of the partnerships. The entities satisfy all of the aggregation requirements listed below. Celia and Larry may aggregate all three partnerships. Leslie may aggregate the two partnerships in which she owns an interest. The partnerships are commonly controlled for purposes of all three individuals—it does not matter that only Celia owns more than a 50 percent interest in the entities.

2. The “control test” is satisfied (i.e., 50 percent common ownership test);
3. The entities share the same tax year so that all items to be aggregated are reported on returns within the same tax year (not taking into account short tax years);
4. None of the businesses to be aggregated are SSTBs;
5. Two of the following three requirements are satisfied: (a) the businesses must offer the same products or services (or those typically offered together), (b) the businesses must share facilities or other centralized functions (such as personnel, human resources, accounting, legal, purchasing, etc.), or (c) the businesses are operated in coordination with, or reliance upon, one or more businesses in the group.³
6. The business to be aggregated must qualify as a trade or business (i.e., under IRC Section 162), rather than a hobby.

Activities are treated as a trade or business if the activity involves renting or licensing property to a commonly controlled entity (see Q ).

Aggregation must be reported consistently in all subsequent tax years. If the taxpayer acquires a new business that satisfies the above requirements, that new business may be aggregated with the existing group. If the aggregated group ceases to meet the above requirements, the aggregation will no longer apply. Taxpayers will be required to include certain information with their federal income tax returns each year regarding the aggregation requirements.⁴ Both the proposed and the final regulations provide that the choice as to whether to aggregate certain businesses is elective, but once the taxpayer makes the election, it cannot be revoked. However, newly acquired businesses may be added to an existing aggregation (either at the individual or entity level) if all of the regulations’ requirements are satisfied. Similarly, if an existing aggregation stops being permitted because of a change in circumstances, the businesses will no longer be aggregated.⁵

Planning Point: Aggregation for Section 199A purposes takes place at the owner level under the proposed regulations. This means that one partner may choose to aggregate businesses, while another partner with ownership interests in the same businesses may not choose to aggregate those same businesses.⁶ Under the final regulations, aggregation is also permitted at the entity level.⁷

The choice as to whether to aggregate certain businesses is elective, but once the taxpayer makes the election, it cannot be revoked.

Planning Point: Aggregation can be useful in the case of business structures where one business may generate substantial income but has low W-2 wages, and the opposite is true for another business under common control.

Both the proposed and the final regulations provide that the choice as to whether to aggregate certain businesses is elective, but once the taxpayer makes the election, it cannot be revoked. However, newly acquired businesses may be added to an existing aggregation (either at the individual or entity level) if all of the regulations’ requirements are satisfied. Similarly, if an existing aggregation stops being permitted because of a change in circumstances, the businesses will no longer be aggregated.⁸

1.  Prop. Treas. Reg. § 1.199A-4(b)(2).