Aggregation election by an individual

Client is an individual who is above the income limit for 199A purposes and will be there as long as he is working. He received a K-1 from a partnership which he is ~1% partner. The K-1 breaks out seven activities in their disclosure and each activity shows a loss. Two questions:

1) If he wishes to aggregate activities, I assume the aggregation election on his individual return has to be made with his return regardless of whether the activities all show a loss or not. Is that correct?

2) There is no way for him to get pertinent information about the partnership activities as it relates to each particular trade or business and what they project in the future. If information is not available, is the prudent thing to do to make the aggregation election anyway?

Since there are no other replies yet, I'm going to chime in both in response, and with what I'm seeing related to this on one particular return. Maybe everyone else knows this stuff already, but there's nothing like actual client data to spur some investigation (at least for me).

To your questions: why would he want to make the aggregation election if all activities show a loss? The QBI loss carryforward will be aggregated to a single number anyway. Save the election for a future year where it might make a difference.

Also, remember SSBs cannot be aggregated.

I am now working on my first return where there are several K-1s, each with multiple QBI activity reporting (some SSB with profit, others non-SSB with loss) and also including UBIA (no wages). And the taxpayer is in the taxable income phase-out range, so I'm also using this as a test return to see how various scenarios play out. For example, I am trying to treat the SSBs as if they were non-SSBs, etc.

1) Despite my advice above to not aggregate if it doesn't help (such as with all activities are a loss), I do wonder when it could ever hurt to aggregate. I'm trying to think of an example when aggregation would make things worse instead of better. Maybe if you aggregated activities A and B this year, but next year you wish you could aggregate A with C instead? (But why not just include C in the first place?).

2) For SSBs, the prohibition against aggregation can hurt, but in a sense, it doesn't hurt as much as it would for non-SSBs, because the overall "applicable percentage" reduction in the phase out range (the straight-line phaseout that brings SSBs to zero QBID at the top of the phase out range no matter what) already takes you down so far, the wage/UBIA reduction phase-in just adds a little insult to the injury, not a lot.

3) when it comes to loss netting, at least the SSB "applicable percentage" still applies (so a loss due to SSBs when taxpayer is in the phase out range is reduced, just like SSB income would be reduced). But why doesn't the wage/UBIA reduction also apply when it comes to loss netting (making the carryforward loss smaller)? Unfair asymmetry!

This can all be quite complicated (so much for "TCJA simplification"), and I find it very hard to believe that any Congresscritter really understood any of this when they passed (just barely) this legislation.

Thanks for weighing in makbo, I appreciate it.

My initial reaction to aggregation was that most companies would want to aggregate somewhat akin making the deminimus safe harbor election--what do you have to lose? The only example I've seen where it can be detrimental would be where one or more asset-intensive companies in the group have an extraordinarily large UBIA and that separately can produce a larger QBID. Other than that, I can't think of another scenario. There is a good example of that in the May edition of the Tax Adviser.

https://www.thetaxadviser.com/issues/2019/may/sec-199a-aggregation-trades-businesses.html

In my client's case, none of the business listed are an SSB. I'm significantly hamstrung because the client is nothing more than a tiny investor in a partnership that owns these companies so there is no way to get a handle on profit projections they way I could if each T or B was a client. I feel like I'm driving blindfolded.

You advice to hold the election until next year is a good one and I will forego the election for 2018. I had forgotten the QBI carryforward loss will be aggregated and treated as negative QBI from a separate trade or business in 2019. Moreover, 2018 is the only year we will be allowed to go back and change our aggregation decision on an amended return should it be beneficial to do so.

What was ignored in post #2 is the rule about 50% ownership needed to aggregate.

https://www.thetaxadviser.com/issues/20 ... esses.html

Regs. Sec. 1.199A-4(b)(1)(i)

the rule about 50% ownership needed to aggregate.

Right, but wouldn't seven activities all on the same K-1 most likely meet that rule? (admittedly, I haven't stopped to look up the rule). In both the OP's and my scenarios, these are QBI amounts reported on a partnership and/or S-corp K-1.

3) when it comes to loss netting, at least the SSB "applicable percentage" still applies (so a loss due to SSBs when taxpayer is in the phase out range is reduced, just like SSB income would be reduced). But why doesn't the wage/UBIA reduction also apply when it comes to loss netting (making the carryforward loss smaller)? Unfair asymmetry!

Now I'm not so sure of this. For a while I thought the pass-through QBI loss (from K-1s) QBI was somehow being limited based on the K-1 ordinary income/(loss), but now I see that it is more likely the taxable income that is limiting it, not the K-1 income (especially considering this a non-passive activity).

Unfortunately, my software is not showing complete calculations for QBI loss phase-outs, only QBI income. [But, I think they are doing the calculations, just not showing them]. Since the QBI loss carryforward varies directly with the amount of taxable income in my test scenario, I've got to think that is the most likely explanation, but stay tuned for further updates as they happen.

Now for an extra question: one of the top-level limitations on QBI deduction has to do with taxable income net of capital gains. Does a QBI loss carryforward get the same limitation, only in reverse? I don't know if this would ever come up in real life, but just thinking aloud.

admittedly, I haven't stopped to look up the rule

There are 4 factors that need to be met, one of which is the 50% rule. One of the other 4 factors is:

The trades or businesses to be aggregated satisfy at least two of the following factors (based on all of the facts and circumstances):
**The trades or businesses provide products, property, or services that are the same or customarily offered together.
**The trades or businesses share facilities or share significant centralized business elements, such as personnel, accounting, legal, manufacturing, purchasing, human resources, or information technology resources.
**The trades or businesses are operated in coordination with, or reliance upon, one or more of the businesses in the aggregated group (for example, supply chain interdependencies).

In other words, there are not a lot of business that you have a teeny interest in that can aggregate.

In other words, there are not a lot of business that you have a teeny interest in that can aggregate.

" An individual may aggregate trades or businesses operated directly or through an RPE to the extent an aggregation is not inconsistent with the aggregation of an RPE." §1.199A-4(b)(2)(i)

" If an RPE itself does not aggregate, multiple owners of an RPE need not aggregate in the same manner. " §1.199A-4(b)(2)(ii)

Now that I am reflecting on this more, we don't know whether the RPE could aggregate the seven businesses in the case of the partnership in my client's case. If the partnership itself only had a 25% in each entity, the ownership % would never rise the the 50% or more level. Moreover, we also don't know whether the seven businesses have any interaction amongst themselves in order meet the 2 of 3 test.

So, how would a partner in any partnership ever be able to aggregate the businesses listed in their K-1 unless they had substantially more information about each operating business to determine if they can meet the Reg 1.199A-4 rules?

Now that I am reflecting on this more, we don't know whether the RPE could aggregate the seven businesses in the case of the partnership in my client's case. If the partnership itself only had a 25% in each entity, the ownership % would never rise the the 50% or more level. Moreover, we also don't know whether the seven businesses have any interaction amongst themselves in order meet the 2 of 3 test.

I don't think you have to have 50% ownership, just someone, somewhere, has to meet that test. In my client example, I can tell from the nature of my client's employment with the K-1 issuers, and the names of the separate QBI activities, that they are probably all related.

If you turn out to be wrong, I believe the IRS Commissioner can dis-aggregate the previously aggregated entities, and perhaps prohibit future aggregration for 3 years (I recall reading something like that). I imagine this will be audited as aggressively as SSTB determinations, and one-property rentals as trade/business activities.

I agree that only some entity has to have the 50%. In my client's case, we'd need to get additional information to be sure the K-1 entity itself has at least a 50% ownership in each of those entities. You'd think they would provide that information on each partner's K-1.