Aggregate, Aggregate, Aggregate

Published on: 12:01PM Aug 22, 2018

One of the very best features of the proposed Section 199A regulations is the ability of higher income farmer to elect to aggregate their common controlled entities into one "entity" for purposes of calculating the Section 199A deduction.  This is especially true regarding cash rental entities that have a high amount of income but no wages or qualified property to allow any Section 199A deduction on a stand-alone basis.

As an example, assume Amy has a Schedule F farm that rents ground from an LLC owned by her and her husband.  The Schedule F generates $200,000 of income and the LLC generates $1 million of rental income.  The Schedule F also pays $500,000 of wages and has no qualified property.  Without electing to aggregate, Amy will have a $40,000 Section 199A deduction from her Schedule F (ignoring the effects of the SE tax deduction), but will lose the $200,000 deduction from the LLC since it has no wages or qualified property.

However, if she elects to aggregate the two entities together, then all $1.2 million of combined income will qualify for the deduction and thus, create a $240,000 Section 199A deduction.

Now, let's assume that she farms as a S corporation. The result will be the same unless she has a fiscal year S corporation.  In that case, she is unable to aggregate.   A solution is to change the year-end to agree to the LLC's year-end.

Now, it gets more complicated with a C corporation.  You are unable to aggregate a C corporation with a rental LLC.  However, the rental LLC will now likely qualify as QBI income, however, since it has no wages or qualified property, in this case, there will be no Section 199A deduction at all.

As far as we can tell, there is no downside to making the aggregation election.  If you are under the threshold, it does not matter.  If you are over, we cannot think of a situation where the deduction would be greater without aggregation.  If we find one, we will let you know.