Should I aggregate different businesses for wage and qualified property calculation purposes, or consider them to be separate on to maximize my 20% Section 199A deduction?
Internal Revenue Code Section 199A was enacted as part of the 2017 Tax Cuts and Jobs Act (TCJA), and slightly modified in 2018. This provision provides a tax deduction of up to 20% of the net income that a taxpayer receives from an active trade or business, which may include rental real estate and professional practice income other than wages.
One of the most complicated parts about dealing with Section 199A is whether to take advantage of the option to consider two or more separate trades or businesses that a taxpayer may own interests in as grouped together for purposes of the wage and qualified property test. For example, an individual may own 30% of one S corporation that repairs houses and has many employees, and 20% of another S corporation that remodels kitchens and bathrooms and has no employees.
As long as the taxpayer and one or more individuals have more than 50% common ownership of these two companies (such as if one other person owned at least 30% of each company), then the taxpayer can elect to treat these as one entity, so that wages paid by the first company can be used to qualify the income from both companies for the Section 199A deduction.
Once two or more entities are aggregated, they can never be pulled apart unless there are significant changes in circumstances that would cause them to no longer be eligible for aggregation. Rental properties can also be aggregated, but residential rental property operations cannot be aggregated with non-residential rental operations under the new regulations.
This is a complicated area of tax law. It is strongly recommended that a tax lawyer be consulted who is familiar with these rules.