QBI Aggregation Rules: Should You Combine Your Businesses?

The Qualified Business Income (QBI) deduction offers significant tax savings by allowing eligible business owners to deduct up to 20% of their QBI. However, understanding the QBI aggregation rules, which determine whether multiple businesses can be combined for deduction purposes, is critical. Proper application of these rules can maximize tax benefits.

Aggregation requires evaluating factors such as ownership, income qualifications, and compliance. Strategic planning is key to making informed decisions about combining business activities.

Ownership and Control Requirements

Ownership and control are central to QBI aggregation. To qualify, the same person or group must own at least 50% of each business throughout the tax year, and the businesses must share a common tax year. The Internal Revenue Code (IRC) Section 199A outlines these requirements to ensure that only businesses with genuine economic ties are aggregated.

Control extends beyond majority ownership. It includes the ability to influence business operations and policies, such as appointing key management personnel. For example, if a family owns multiple businesses but different members control each, they may not satisfy the control requirement.

Aggregated businesses must also provide products, property, or services that are the same or commonly offered together. For instance, a restaurant and a catering service owned by the same individual could qualify if they share resources and management, as their services are complementary.

Criteria for Qualifying Income

Understanding what constitutes Qualified Business Income (QBI) is essential. QBI includes the net amount of income, gain, deduction, and loss from a qualified trade or business, excluding items like capital gains, dividends, and interest income. The income must relate to a U.S.-based trade or business and be part of taxable income.

Eligible business structures include sole proprietorships, partnerships, S corporations, and certain trusts or estates. C corporations are excluded. Additionally, Specified Service Trades or Businesses (SSTBs)—such as those in health, law, or consulting—face deduction limits if taxable income exceeds certain thresholds.

The QBI deduction requires calculating income for each business before considering aggregation. This involves reviewing financial statements to ensure eligible income and deductions are correctly identified. Expenses directly tied to the business, such as wages and cost of goods sold, are subtracted from gross income to determine QBI. Accurate records are critical to avoid compliance issues or reduced deductions.

Filing Considerations for Aggregated Activities

Filing for the QBI deduction with aggregated activities involves detailed compliance. Taxpayers must use Form 8995 or Form 8995-A, depending on taxable income, to report aggregated income accurately. Separate records for each business must be maintained while consolidating relevant data for aggregation.

Aggregation affects key components of the tax return, such as wage and qualified property limitations under IRC Section 199A. These limits are calculated on an aggregated basis, allowing taxpayers to leverage higher wage or property amounts across businesses to potentially enhance the deduction. However, this requires precise calculations and thorough documentation.

Once elected, aggregation must be applied consistently in future tax years unless significant changes—such as ownership or operational shifts—warrant a revocation. Taxpayers should monitor changes that could impact aggregation and consult with tax professionals to ensure compliance and optimize deductions.

Election and Revocation Procedures

Electing to aggregate businesses for the QBI deduction is a strategic choice. Taxpayers must attach a detailed statement to their tax return, explaining the economic interdependence of the aggregated businesses. This includes outlining shared resources and describing business activities to meet IRS requirements.

The election must remain consistent in subsequent years unless there is a substantial change in circumstances, such as shifts in ownership or operations. Revoking an aggregation requires providing a detailed explanation of the changes and how they alter the original rationale. This often involves amending prior tax returns and ensuring compliance with current laws.

Recordkeeping Essentials

Thorough recordkeeping is vital for QBI aggregation. Taxpayers must maintain documentation proving that businesses meet the ownership, control, and operational interdependence requirements. This includes agreements, organizational charts, and evidence of shared resources or management.

Operational records should demonstrate how businesses are interconnected. For example, payroll records should show shared employees, and contracts or invoices should reflect inter-business transactions. Supporting documentation strengthens the case for aggregation and ensures compliance.

Digital tools can simplify recordkeeping by integrating data from multiple entities, tracking shared expenses, and generating consolidated reports. However, taxpayers must maintain separate books for each business while enabling aggregation analysis. Regular audits of these records can help identify discrepancies early, minimizing the risk of IRS scrutiny. Failing to provide adequate documentation could result in the disallowance of the QBI deduction, highlighting the importance of meticulous recordkeeping.