Are there specific rules under Section 199A that allow or prohibit the aggregation of activities for the qualified business income deduction?
Ask Blue J any tax question, then go deeper. Follow up, add client-specific context, and explore the sources behind every answer with Blue J’s generative AI solution for tax research.
Yes, there are specific rules under Section 199A and its regulations that both allow and restrict the aggregation of activities for purposes of the qualified business income (QBI) deduction. The aggregation rules are detailed in Treasury Regulation §1.199A-4 and are designed to permit, but not require, taxpayers to treat multiple trades or businesses as a single aggregated trade or business for purposes of calculating the QBI deduction, provided certain criteria are met.
Key Aggregation Rules under Section 199A
1. Permissive Aggregation
- Taxpayers (including individuals and relevant pass-through entities (RPEs) such as S corporations and partnerships) may elect to aggregate two or more trades or businesses for QBI purposes, but aggregation is not mandatory. Each trade or business is treated separately unless aggregation is affirmatively elected and the requirements are satisfied.
2. Aggregation Criteria
To aggregate trades or businesses, all of the following requirements must be met:
- Common Ownership: The same person or group of persons, directly or by attribution under sections 267(b) or 707(b), must own 50% or more of each trade or business to be aggregated. For S corporations, this means 50% or more of the issued and outstanding shares; for partnerships, 50% or more of the capital or profits interests.
- Ownership Duration: The common ownership must exist for a majority of the taxable year, including the last day of the taxable year.
- Same Tax Year: All items attributable to each trade or business to be aggregated must be reported on returns with the same taxable year (excluding short tax years).
- No SSTBs: None of the trades or businesses to be aggregated can be a specified service trade or business (SSTB) as defined in Section 199A(d)(2) and the regulations.
- Two of Three Operational Factors: The trades or businesses to be aggregated must satisfy at least two of the following three factors (based on all facts and circumstances):
- Provide products, property, or services that are the same or customarily offered together.
- Share facilities or significant centralized business elements (such as personnel, accounting, legal, manufacturing, purchasing, human resources, or IT).
- Operate in coordination with, or reliance upon, one or more of the businesses in the aggregated group (e.g., supply chain interdependencies).
3. Special Rules for Rental Activities
- Rental activities may be aggregated with other trades or businesses if they meet the above requirements. Additionally, a rental activity that does not rise to the level of a Section 162 trade or business may still be treated as a trade or business for Section 199A purposes if the property is rented to a commonly controlled trade or business (a "self-rental" rule).
4. Aggregation at the Entity Level
- RPEs (such as S corporations and partnerships) may aggregate trades or businesses at the entity level. If an RPE aggregates, its owners must follow that aggregation and cannot disaggregate those businesses, though they may add additional trades or businesses to the aggregation if the requirements are met.
5. Consistency and Disclosure Requirements
- Once aggregation is elected, it must be consistently reported in all subsequent years unless there is a significant change in facts and circumstances that would cause the aggregation to no longer qualify.
- Taxpayers must attach a statement to their return (or, for RPEs, to each owner’s Schedule K-1) each year disclosing:
- A description of each trade or business aggregated,
- The name and EIN of each entity,
- Information on any trade or business formed, ceased, acquired, or disposed of during the year,
- Information on any aggregated trade or business of an RPE in which the taxpayer holds an interest,
- Any other information required by the IRS.
- Failure to properly disclose aggregation may result in the IRS disaggregating the businesses and prohibiting aggregation for the next three years.
6. Prohibitions and Limitations
- Aggregation is not allowed if any of the businesses is an SSTB.
- Aggregation is not required; taxpayers may choose not to aggregate even if eligible, and may elect to aggregate in a future year if desired.
- Aggregation cannot generally be made on an amended return (except for the 2018 tax year).
7. Effect of Aggregation
- When businesses are aggregated, QBI, W-2 wages, and unadjusted basis immediately after acquisition (UBIA) of qualified property are combined for purposes of applying the Section 199A limitations (the wage and property tests), which can increase or decrease the allowable deduction depending on the facts.
Summary Table of Aggregation Criteria
Conclusion
Section 199A and its regulations provide a clear, but restrictive, framework for aggregating trades or businesses for the QBI deduction. Aggregation is allowed only if all the regulatory requirements are met, and is prohibited if any business is an SSTB or if the other criteria are not satisfied. Proper disclosure and consistent application are required, and aggregation can have significant effects on the calculation of the QBI deduction.
If you are considering aggregation, it is important to carefully analyze whether your businesses meet all the requirements and to maintain thorough documentation and disclosures. Aggregation can be a powerful tool to optimize the QBI deduction, but it must be used in strict compliance with the rules.
Was this answer helpful?
What Blue J customers are saying
“We are excited to use Blue J to elevate the initial work product our team is able to produce."
"We’re incorporating Blue J to ensure our people are well-equipped with a research tool that delivers on both ease of use and quality of deliverable. It will save us a lot of time as a starting point, so we can focus our efforts on the analysis. Ultimately, it helps us get to the right answer, faster.”
"We’re incorporating Blue J to ensure our people are well-equipped with a research tool that delivers on both ease of use and quality of deliverable. It will save us a lot of time as a starting point, so we can focus our efforts on the analysis. Ultimately, it helps us get to the right answer, faster.”
"We had used Checkpoint for a long time but found it wasn’t particularly well-used in our practice."
"A lot of our practitioners would have to turn to Google to find what they were looking for, which of course isn’t ideal. Blue J is a real game-changer when it comes to this, since it combines the efficiency of Google with the authoritative tax materials our people really need to serve their clients best. At ELO, we pride ourselves on providing services that are focused on value for clients and exceeding their expectations. Adding Blue J to our toolbox will enable us to do just that, as we continue to evolve our service offerings to better serve our clients’ needs.”
"A lot of our practitioners would have to turn to Google to find what they were looking for, which of course isn’t ideal. Blue J is a real game-changer when it comes to this, since it combines the efficiency of Google with the authoritative tax materials our people really need to serve their clients best. At ELO, we pride ourselves on providing services that are focused on value for clients and exceeding their expectations. Adding Blue J to our toolbox will enable us to do just that, as we continue to evolve our service offerings to better serve our clients’ needs.”
"We find this tool to be a game-changer for us and our clients.”
“We had the opportunity to pilot some other AI solutions in the market, and found that the improvement over traditional search was limited - except in Blue J’s case, where the efficiency gain over traditional research methods is significant."
“We had the opportunity to pilot some other AI solutions in the market, and found that the improvement over traditional search was limited - except in Blue J’s case, where the efficiency gain over traditional research methods is significant."
“Blue J is an exciting technology because it enables the practitioner to remain in the driver’s seat of the analysis."
"Thoughtful functions are included to encourage and facilitate deeper analysis, not to replace or reduce it. We’ll continue to find new and impactful ways to leverage the technology, which has benefited our clients and staff alike. At RSM we strive to be compelling to our clients and to be digital by embracing new technologies to fulfill that promise.”
"Thoughtful functions are included to encourage and facilitate deeper analysis, not to replace or reduce it. We’ll continue to find new and impactful ways to leverage the technology, which has benefited our clients and staff alike. At RSM we strive to be compelling to our clients and to be digital by embracing new technologies to fulfill that promise.”
"We wanted to have a tool that people were using at all staff levels."
"We wanted something that lived up on their third screen - something that would be available and helpful to them every day. What we've found is it's been easy to get people to get into the habit of using Blue J because it helps people. Blue J allows us to quickly respond to client questions in a way that they can understand it, which helps us deal with the volume of client questions that come in. We were up and running very quickly with Blue J - within 5 minutes, our staff understood how this will be helpful, and the rest of the training program is refining prompting skills and building use cases and best practices."
"We wanted something that lived up on their third screen - something that would be available and helpful to them every day. What we've found is it's been easy to get people to get into the habit of using Blue J because it helps people. Blue J allows us to quickly respond to client questions in a way that they can understand it, which helps us deal with the volume of client questions that come in. We were up and running very quickly with Blue J - within 5 minutes, our staff understood how this will be helpful, and the rest of the training program is refining prompting skills and building use cases and best practices."
