When Not to Aggregate?
In yesterday’s post I indicated that you typically would want to always aggregate and I asked for readers to let me know when you would not want to aggregate. Someone did send in an example when it is better to not aggregate, however, it is very limited and likely not applicable in farming, but I will share it.
Suppose you have a farm operation that nets $200,000 and has $80,000 of wages and no qualifying property. It rents ground from a related entity that earns $75,000, has no wages and has qualifying property QP of $600,000. If the farmer elects to aggregate these two entities, total qualifying business income (QBI) is $275,000 and tentative deduction is $55,000. The limit is then the greater of $40,000 (wages times 50%) or $35,000 (25% of wages plus 2.5% of QP), therefore, the deduction is limited to $40,000, losing $15,000 of the deduction.
However, if the farmer does not aggregate, the farm’s overall limit is $40,000 and the rental limit is $15,000 allowing a total deduction of $55,000, or no reduction. Now, why is it unlikely for farm operations. Most farm operations have wages and a large amount of QP and almost all farm ground that is cash rented has very little QP. Therefore, this example is more likely to work out for manufacturers or other businesses than farming, but it is an example of when it is better not to aggregate.
Paul Neiffer is a certified public accountant and business advisor specializing in income taxation, accounting services, and succession planning for farmers and agribusiness processors. Paul is a principal with CliftonLarsonAllen in Walla Walla, Washington, as well as a regular speaker at national conferences and contributor at agweb.com. Raised on a farm in central Washington, he has been immersed in the ag industry his entire life, including the last 30 years professionally. Paul and his wife purchase an 180 acre ranch in 2016 and enjoy keeping it full of animals.
I have a question related to Bart Bradshaw’s. If you are under the income threshold and have common ownership between the rental entity and the operating entity, are you eligible for the deduction even if you can’t aggregate the businesses (because operating entity is a fiscal year S Corp or a C Corp) and even if there are no wages or QP?