How Aggregating Business Activities Can Maximize the 20% QBI Deduction

Every taxpayer felt the full effects of tax reform this filing season, but there seemed to be one deduction that helped certain businesses benefit the most. Flow through business owners, such as sole proprietors, partnerships and S corporations, were likely the biggest winners this year due to the new qualified business income (QBI) deduction.

The final QBI regulations provided a certain amount of clarity, but working through real-life examples opened our eyes to a couple of key components of the deduction that can have a significant impact on those with real estate holdings.

Rental Real Estate Enterprises

Rental real estate enterprises (RREE) can qualify as a trade or business for purposes of the QBI deduction by including a signed safe harbor election with your tax return which certifies that:

  1. Separate books and records are being maintained to reflect income and expenses for the RREE,
  2. 250 hours of rental services are performed per year with respect to the RREE, and
  3. The taxpayer maintains contemporaneous records including time reports, logs or similar documents regarding all services performed for an RREE

Aggregating Trade or Business Income

Business owners can significantly increase their QBI deduction by ‘aggregating’ the activity of interrelated, commonly owned businesses. Aggregation allows profitable businesses with little or no wages or depreciable assets that would otherwise not be eligible for a QBI deduction to utilize wages and depreciable assets of a related business to achieve the maximum 20% QBI deduction.

There are a few things to keep in mind when considering aggregating trade or business income:

  1. Once an aggregation election is made, it must be reported consistently in subsequent years,
  2. Newly created businesses may be added to an aggregated group, but existing businesses may not,
  3. You can make an initial election to aggregate trade or business income at any time, but if fail to aggregate, you may not amend your tax return to aggregate after the 2018 taxable year, and
  4. A statement must be filed with your personal tax return each year indicating your desire to aggregate trades or businesses for purposes of the QBI deduction.

Whether you are still working to finalize your 2018 tax filings or if you are already planning to minimize your 2019 tax liability, these strategies are worth considering. Contact an Anders advisor to find out which tax incentives are best for you, or learn more about the Anders Real Estate Group.