IRS Explains Aggregation Rules Under Proposed Regulations for Pass-Through Income Deduction

The IRS recently issued proposed regulations that clarify who can benefit from a new deduction for eligible pass-through income. (See this article for more details.) One of the issues clarified is how individuals can elect to aggregate their trades or businesses for purposes of the qualified business income (QBI) deduction under Section 199A.

While the aggregation rules are generally considered favorable to individual owners, the implementation of these rules will require an in-depth analysis for individuals choosing to aggregate. Please note that the term individual refers to an individual, trust, estate or other person eligible to claim the Section 199A deduction.

Aggregation Basics

QBI is generally the net amount of qualified items of income, gain, deduction, and loss with respect to a pass-through entity. When individuals own interests in more than one qualifying trade or business, they may elect to aggregate as a single trade or business for purposes of calculating QBI and QBI deduction limitations.

Aggregating trades or businesses can allow an individual to increase the QBI deduction by combining W-2 wages and the unadjusted basis immediately after acquisition (UBIA) of qualified property of multiple trades or businesses. 

An individual can aggregate qualified trades or businesses that are operated:

  • Directly, such as through a sole proprietorship or a single-member LLC
  • Via pass-through entities, such as S corporations, partnerships, or LLCs

The respective owners of pass-through entities might not aggregate in the same fashion because aggregation decisions are made at each individual’s level.   

Five Aggregation Requirements

Aggregation isn’t automatic—it must be elected. In general, an individual can aggregate trades or businesses only if the five requirements listed below are satisfied.

Requirement One

The same person or group of persons directly or indirectly owns 50% or more of each trade or business to be aggregated. For those operated by an S corporation, that means owning 50% or more of the issued and outstanding shares for each entity.

For trades or businesses operated by partnerships (including LLCs treated as partnerships for tax purposes), that means owning 50% or more of the capital or profit interests for each entity. For purposes of applying the 50% ownership rule, an individual is also considered to own the interest in each trade or business that’s owned directly or indirectly by his or her spouse, children, grandchildren, or parents.

Requirement Two

The preceding 50% ownership structure exists for a majority of the tax year in which the items attributable to each trade or business to be aggregated are included in the individual’s income.

Requirement Three

All the tax items attributable to each trade or business to be aggregated are reported on returns with the same tax year end.

Requirement Four

None of the trades or businesses to be aggregated is a specified service trade or business. Income from a specified service trade or business generally doesn’t qualify for the pass-through deduction.

Requirement Five

The trades or businesses to be aggregated must satisfy at least two of the following three requirements. They must:

  • Provide products and services that are the same or customarily offered together (for example, a restaurant and catering business)
  • Share facilities or significant centralized business elements (such as personnel, accounting, legal, manufacturing, purchasing, human resources, or information technology)
  • Be operated in coordination with or in reliance on each other (such as a supply-chain interdependency)

Aggregation Example

These aggregation rules are complex, so here’s an example to help provide clarification.

Rebecca is a single, calendar-year small business owner with taxable income of $500,000 before any QBI deduction. She’s subject to the QBI deduction limitations based on W-2 wages and the UBIA of qualified property.

She owns and operates a catering business and a restaurant via separate single-member LLCs (SMLLCs) that are treated as sole proprietorships owned by her for tax purposes. The two operations share centralized purchasing and accounting, all done by Rebecca.

She also maintains a website and does print advertising for both operations. The restaurant kitchen is used to prepare food for the catering business, but the catering business employs its own staff and owns equipment and trucks that aren’t used by the restaurant.

The catering business has QBI of $400,000, but no W-2 wages because all the work is done by independent contractors hired job-by-job. The restaurant business has QBI of only $25,000, but it has regular employees with $190,000 of W-2 wages.

If Rebecca keeps the two businesses separate for QBI deduction purposes, her deduction from the catering business is $0 (50% × W-2 wages of $0), and her deduction from the restaurant is $5,000 (20% × QBI of $25,000), for a total deduction of only $5,000.

But if Rebecca is allowed to aggregate the two businesses, her deduction is $85,000—the lesser of $85,000 (20% × aggregated QBI of $425,000) or $95,000 (50% × aggregated W-2 wages of $190,000) or $100,000 (20% x taxable income of $500,000). If she can aggregate the businesses, her QBI deduction would be $80,000 higher.

But is she allowed to aggregate them?

Requirements Satisfied

Because the restaurant and catering businesses are held in SMLLCs that are treated as sole proprietorships owned by Rebecca, she’s treated as directly owning and operating both businesses. Because common ownership of the businesses (100% by Rebecca) exists for the entire tax year, and because all the tax items attributable to both businesses are reported on Rebecca’s calendar-year return, aggregation requirements one, two, and three are satisfied.

Neither business is a specified service business, so aggregation requirement four is also satisfied. Because both businesses offer prepared food to customers and share the same kitchen facilities, and also because they both share centralized purchasing, accounting, and marketing functions, aggregation requirement five is satisfied.


Rebecca can aggregate the catering and restaurant businesses for purposes of calculating her QBI and for purposes of applying the QBI deduction limitations based on W-2 wages and the UBIA of qualified property—and she can claim a QBI deduction of $80,000.

Consistency Requirement

Once an individual chooses to aggregate two or more trades or businesses for QBI deduction purposes, he or she generally must continue to aggregate the trades or businesses in all subsequent tax years. However, an individual can add a newly created or newly acquired business to an existing aggregated group of businesses if the five aggregation requirements are met.

If there’s a change in facts and circumstances so that an individual’s prior aggregation of a trade or business no longer qualifies for aggregation, the individual must reapply the requirements to determine a new permissible aggregation, if any.

Required Annual Disclosure

For each tax year, an individual must attach a statement to his or her federal income tax return for that year identifying each trade or business that’s been aggregated. The statement must include, among other things, the name and employer identification number of each entity. If an individual fails to attach the required statement, the IRS can disaggregate the trades or businesses.

We’re Here to Help

The aggregation rules for the QBI deduction are complex, but they may allow certain trades or businesses to achieve more favorable tax results. To learn more about this provision and how you might apply it to your company, contact your Moss Adams professional. You can also explore additional other tax break opportunities on our dedicated tax reform webpage.

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