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Aggregation of Multiple Businesses
By Jason Watson, CPA
Posted Wednesday, November 1, 2023
There are provisions for aggregating multiple businesses under common control or ownership (similar to controlled group rules). This might be to your advantage since you must compute Section 199A limitations for each business entity prior to adding them together. Therefore, if you are being limited in one entity based on W-2 Section 199A limits, then you can “rob” W-2 wages from another entity. There are all kinds of rules and technical issues of course.
Entities, such as partnerships and S corporations, cannot make this election since Section 199A is an individual deduction on an individual tax return. Specified service trades or business cannot be part of a Section 199A aggregation; so an online retailer who is also an attorney cannot aggregate the entities.
The aggregated business entities must meet the ownership or control rules. Makes sense, but they also must satisfy at least two of the following factors-
- The entities provide products and services that are the same or customarily offered together, or
- The entities share facilities or share significant centralized business elements, or
- The entities are operated in coordination with, or reliance upon, one or more of the businesses in the aggregated group (such as supply chain interdependence).
Just like Meatloaf… 2 out of 3 ain’t bad. This will be very complicated very quickly. Good luck!
Also keep in mind that the Section 199A deduction is limited on two levels; the entity level and the individual’s taxable income level. Huh? The first calculation is done at the entity level to determine a W-2 and / or depreciable asset limitation. These limits are later aggregated and “sent over” to the individual tax return for the partner, member or owner as designated on the K-1.
The second limit is then based on the taxable income of the individual tax return (Form 1040). In other words, there are two hurdles with the Section 199A deduction and each hurdle can give a haircut to the tax deduction.
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