Final Regulations Issued for Qualified Business Income (QBI) Aggregation
Final regulations have been issued for Sec. 199A to guide taxpayers and tax professionals on how to implement the new qualified business income (QBI) deduction, created by the Tax Cuts and Jobs Act. They include how to determine when taxpayers can aggregate multiple trades or businesses, which is the focus of this Tax Alert.
The Qualified Business Income deduction is available to individuals, trusts, and estates with QBI, qualified real estate investment trust (REIT) dividends, or qualified publicly traded partnership (PTP) income. If a taxpayer meets certain qualified trade or business rules and has qualified wage and capital asset levels, they may be eligible to receive a deduction from taxable income of up to 20% of their eligible QBI. For taxpayers under certain income levels (married filing jointly less than $315K; all others less than $157.5K), QBI is not restricted by a business’s wages or capital investments and therefore, there is no advantage to aggregating qualified trades/businesses.
There are various restrictions for higher income taxpayers. The business must not be a specified service trade or business (SSTB) which provides health, law, accounting, consulting, investing, or trading services, among other services. For these taxpayers, assuming the business is qualified, QBI is limited by the W-2 wages the business pays and by its capital investments.
Business #1 has $100,000 of qualified business income, $30,000 of W-2 wages, and $100,000 of capital investments. The 20% QBI deduction (potentially $20,000) is limited to the greater of (a) 50% of wages ($15,000) or (b) the sum of 25% of wages and 2.5% of capital investments ($7,500 + $2,500 = $10,500). In this case, the QBI deduction would be $15,000.
If the taxpayer has a second business (business #2) with the same facts, except $50,000 of W-2 wages, this business would benefit from the full $20,000 QBI deduction. (50% of $50,000 wages = $25,000 QBI deduction limitation)
Income from business #1 was limited in the QBI benefit by the amount of its wages, whereas income from business #2 received the entire QBI benefit it was eligible for. Note that business #2 had excess wages available to offset additional QBI income. For taxpayers that qualify, the regulations allow the QBI wages and capital limitations to be calculated on combined trade or business income rather than for each trade or business individually.
Rules for Aggregation
In order to aggregate, the same person (or group) must own 50% or more of the S-Corps’ shares or 50% or more of the partnerships’ capital or profits. Neither business can be an SSTB. The businesses must meet two of these three criteria: (1) provide products/services that are the same or customarily provided together; (2) share facilities or “centralized business elements” such as personnel, manufacturing, purchasing, and information technology; and (3) co-ordinate with or rely upon each other. Examples from the regulations include a restaurant and a food truck, a gas station and a car wash, and supply chain interdependencies.
Once the election is made, the aggregated activities must be reported consistently in all subsequent tax years unless there is a significant change in facts and circumstances. Therefore, an in-depth analysis is required to determine the most advantageous course of action.
Feel free to reach out to your Sax Advisor to review your facts and circumstances to maximize the tax benefit from the qualified business income deduction. For questions, or to learn more about these final regulations, please call (973) 472-6250 to speak to an advisor within our Real Estate Practice.