When is Better Not to Aggregate?
Aug 23, 2018
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.