Understanding Section 199A Aggregation Rules: Boosting the Qualified Business Income Deduction

The Qualified Business Income Deduction (QBID) under IRC §199A provides a powerful tax benefit for owners of pass-through entities—including sole proprietors, partnerships (Form 1065), and S corporations (Form 1120S). It allows eligible taxpayers to deduct up to 20% of qualified business income (QBI) from their taxable income.

But for some taxpayers, especially those with multiple businesses, maximizing the deduction isn’t always straightforward. That’s where the aggregation rules come into play. These rules allow eligible taxpayers to combine multiple qualified trades or businesses for purposes of computing the deduction, potentially increasing the overall benefit.

In this post, we’ll break down the purpose, rules, examples, and strategic advantages of Section 199A aggregation.

Why Aggregation Matters Under Section 199A

The QBID is subject to limitations based on:

• W-2 wages paid by the business, and

• Unadjusted basis immediately after acquisition (UBIA) of qualified property.

  
  

If one business has low QBI but high W-2 wages or property, and another has high QBI but low wages/property, aggregating the two can yield a higher overall deduction by combining those components.

Without aggregation, each business would have to pass the limitation tests on its own, which could result in a reduced or eliminated deduction.

Who Can Aggregate Under Section 199A?

The IRS allows individuals (including trusts and estates) to aggregate businesses if they meet the following criteria:

1. Common Ownership

• The taxpayer (or a group of taxpayers) must own 50% or more of each business they want to aggregate.

• This includes direct and indirect ownership through entities.

• Ownership must exist for the majority of the tax year, and on the last day of the year.

  
  

2. Same Tax Year and Method

• Each business must use the same taxable year (calendar or fiscal).

• Each business must use the same method of accounting (cash or accrual).

  
  

3. Qualifying Trade or Business

• Each activity must be a qualified trade or business (not an SSTB if income exceeds thresholds).

• Rental activities can qualify if they rise to the level of a trade or business.

  
  

4. Businesses Must Be Related

• The businesses must provide:

  • Products or services that are the same or customarily offered together, or

  • Be part of a coordinated business activity, such as supply chain or customer base overlap.

    
    

How to Elect Aggregation

Aggregation is done at the individual level (not the entity level), and once elected, it must be consistently applied in future years.

Required Disclosure:

Taxpayers must attach a statement to their tax return that includes:

• The names and EINs of each aggregated business.

• Description of each business.

• Facts supporting eligibility.

• Information on any changes in aggregation from prior years.

  
  

Failure to disclose may result in the IRS disregarding the aggregation, which could lower or eliminate the deduction.

Example: How Aggregation Increases QBID

Scenario Without Aggregation

Sarah owns two businesses:

Business	QBI	W-2 Wages	UBIA
Bakery (100% owned)	$100,000	$90,000	$0
Catering (100% owned)	$300,000	$10,000	$0

Sarah’s income is above the §199A threshold, so the W-2 wage limitation applies.

• Bakery: 50% of W-2 wages = $45,000 → Max QBID = $45,000

• Catering: 50% of W-2 wages = $5,000 → Max QBID = $5,000

Total QBID Without Aggregation = $50,000

Scenario With Aggregation

Combined:

• QBI = $400,000

• W-2 Wages = $100,000

• 50% of W-2 = $50,000 → Now applies to the full $400,000 QBI

Total QBID With Aggregation = $50,000

In this example, aggregation doesn’t increase the deduction amount beyond $50,000, but in cases where one business has no wages or property, aggregation can be the difference between getting a deduction or losing it entirely.

Strategic Benefits of Aggregation

1. Maximizing W-2 Wage and Property Limitation

Aggregation allows businesses to pool W-2 wages and qualified property, helping meet the deduction limits.

2. Flexibility for Business Structuring

Owners with multiple entities—especially related businesses—can plan entity structures around aggregation rules to enhance deductions.

3. Benefit for Real Estate Investors

Real estate professionals who actively manage multiple rental properties can often aggregate their properties, allowing them to treat the combined activity as a trade or business.

Pitfalls to Watch Out For

• Aggregation is not optional at the entity level—each owner must decide independently.

• Specified service trades or businesses (SSTBs) cannot be aggregated with non-SSTBs if income exceeds thresholds.

• Once aggregation is elected, it must be consistently applied year to year—changing requires a material change in circumstances.

Final Thoughts

The Section 199A aggregation rules offer a valuable strategy to enhance the Qualified Business Income Deduction, especially for taxpayers with multiple business interests. By combining businesses that complement each other—whether through shared services, ownership, or operations—taxpayers can maximize their deduction and reduce taxable income.

However, the rules are complex, and the aggregation election must be documented carefully. If you have multiple entities or operate across business lines, work with a tax advisor to evaluate whether aggregation makes sense and to structure your return correctly.