Are you a small business owner looking to maximize your tax savings? The Section 199A deduction, also known as the Qualified Business Income (QBI) deduction, offers a fantastic opportunity to reduce your taxable income. One powerful strategy to enhance this deduction is by aggregating trades or businesses. Let’s dive into how this works and why it might benefit you.
What is the Section 199A Deduction?
The Section 199A deduction allows eligible taxpayers to deduct up to 20% of their QBI from a qualified trade or business. This deduction is available to individuals, partnerships, S corporations, and some trusts and estates. However, the rules can be complex, and maximizing the deduction often requires strategic planning.
Why Aggregate Trades or Businesses?
Aggregation involves combining multiple trades or businesses into a single entity to calculate the QBI deduction. This can be advantageous for several reasons:
- Increased Deduction: By aggregating, you may be able to increase your overall QBI, leading to a larger deduction.
- Simplified Reporting: Aggregating can simplify your tax reporting by reducing the number of separate calculations required.
- Meeting Thresholds: Aggregation can help you meet certain income thresholds that might otherwise limit your deduction.
How to Aggregate Trades or Businesses
To aggregate trades or businesses, you must meet specific criteria set by the IRS:
- Common Ownership: The businesses must be commonly owned, meaning the same person or group of people must own at least 50% of each company.
- Integration: The businesses must provide products, property, or services that are the same or customarily offered together.
- Coordination: The businesses must share significant centralized business elements, such as management or administrative functions.
Examples of Successful Aggregation
- Retail and Online Sales: Imagine you own a physical retail store and an online sales platform. Both businesses sell similar products and share centralized management and administrative functions. By aggregating these businesses, you can combine their QBI and W-2 wages, potentially increasing your overall deduction.
- Real Estate and Property Management: Suppose you own several rental properties and a property management company. These businesses are closely related, as the management company provides services to the rental properties. Aggregating them can help you meet the income thresholds and maximize your QBI deduction.
- Professional Services: Consider a scenario where you own a consulting firm and an advisory service. Both businesses offer services that are customarily provided together and share significant centralized business elements. Aggregating these businesses can simplify your reporting and increase your deductions.
Potential Risks of Aggregation
While aggregation can offer significant benefits, it’s essential to be aware of potential risks:
- Complexity and Compliance: Aggregating businesses can add complexity to your tax filings. Ensuring compliance with IRS rules and maintaining proper documentation is crucial to avoid penalties.
- Inconsistent Income: If one of the aggregated businesses experiences a significant downturn, it could negatively impact the overall QBI and reduce the deduction.
- Future Changes: Tax laws and regulations can change. What works today might not be beneficial in the future, so it's essential to stay informed and be prepared to adjust your strategy.
Steps to Implement Aggregation
- Evaluate Eligibility: Review your businesses to ensure they meet the IRS criteria for aggregation.
- Consult a Tax Professional: Work with a tax expert to understand the implications and benefits of aggregation for your specific situation.
- Document Your Decision: Properly document your decision to aggregate, including the rationale and supporting details.
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Final Thoughts
Aggregating trades or businesses can be a powerful strategy to maximize your Section 199A deduction. Understanding the rules and working with a tax professional at Withum, you can potentially increase your tax savings and simplify your reporting. Don’t miss out on this opportunity to optimize your tax strategy! For more information on this topic, please get in touch with us.
Authors: Jennifer Wong, CPA, MST, Partner | [email protected] and Nisha Bhanushali, CPA | [email protected]
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