Section 199A Aggregation Rules for QBI: Tests and Disclosure

The Section 199A aggregation rules let you treat two or more pass-through businesses as a single unit when calculating the qualified business income deduction, so their W-2 wages, property basis, and income are pooled rather than tested separately. This only matters once your taxable income crosses the annual threshold, because that’s when a wage-and-property cap starts squeezing the deduction for any business that pays little payroll or holds few depreciable assets. Combining a low-wage entity with a high-wage or asset-heavy one under the aggregation regulations can rescue a deduction that would otherwise shrink to almost nothing.

When Aggregation Actually Helps

Below the income threshold, aggregation does nothing for you. You take 20% of each business’s qualified business income and move on. Above the threshold, the deduction for each business is capped at the greater of:

50% of W-2 wages paid by the business, or
25% of W-2 wages plus 2.5% of the unadjusted basis immediately after acquisition (UBIA) of qualified property.¹

A one-owner consulting LLC with no employees and a laptop feeds almost nothing into either formula. The deduction for that entity can collapse to near zero above the threshold, no matter how profitable it is. If the same owner also runs a staffing company with real payroll or a real estate entity holding depreciable buildings, aggregating pulls those wages and property values into a shared pool. The deduction is then calculated on the combined figures, and the high-wage or high-asset business effectively carries the one that would otherwise cap out.

2026 Income Thresholds That Trigger the Cap

The One Big Beautiful Bill Act, signed on July 4, 2025, made Section 199A permanent and widened the phase-in range beginning in 2026. The wage-and-property cap now phases in over $75,000 for single filers and $150,000 for joint filers, double the prior ranges.

For tax year 2026, the IRS has set these inflation-adjusted figures:²

Single and head of household: cap begins phasing in at $201,750 of taxable income, fully applies at $276,750.
Married filing jointly: phase-in begins at $403,500, fully applies at $553,500.
Married filing separately: phase-in begins at $201,775, fully applies at $276,775.

Below the lower figure, you get the full 20% deduction with no wage or property test. Between the two figures, the cap is applied proportionally. Above the upper figure, it applies in full. That upper zone is where aggregation earns its paperwork.

The Five Requirements for Aggregating Businesses

You can’t group any arbitrary collection of businesses. Treasury Regulation 1.199A-4 sets five requirements, and every one has to be met.³

Common Ownership of 50% or More

The same person or group must directly or indirectly own at least 50% of each business, for a majority of the tax year. “Indirectly” pulls in the family attribution rules from Sections 267(b) and 707(b) of the Internal Revenue Code, so ownership by your spouse, children, grandchildren, parents, and siblings counts toward your share. If you own 30% of a business and your spouse owns 25%, together you clear the 50% bar.

Same Taxable Year

Every business in the group must share the same tax year. A December 31 calendar-year entity cannot be aggregated with a June 30 fiscal-year entity until their reporting periods line up.

Two of Three Relationship Tests

The businesses must show a genuine operational connection by satisfying at least two of these three factors:

Common products or services: the businesses provide products or services that are commonly offered together or serve the same customer base. A residential construction company and a building materials shop fit here.
Shared facilities or centralized functions: the businesses share significant centralized operations such as accounting, human resources, IT, purchasing, or legal services.
Coordinated operations: the businesses operate in coordination with or reliance on each other. Vertically integrated arrangements where one entity manufactures and another distributes are the classic example.

These tests exist to keep taxpayers from lumping unrelated investments together to game the cap. The IRS scrutinizes claimed relationships, so document the shared functions or coordinated operations with specifics rather than assertions.

No Specified Service Trades or Businesses in the Group

None of the entities being aggregated can be a specified service trade or business (SSTB). One SSTB in the proposed group disqualifies the whole aggregation. This catches people running a professional practice alongside other ventures.

Why SSTBs Are Locked Out

An SSTB is any business whose primary activity falls into health care, law, accounting, actuarial science, performing arts, consulting, athletics, financial services, brokerage services, investing and investment management, trading, dealing in securities or commodities, or any business where the principal asset is the reputation or skill of its owners or employees.⁴

A physician who also owns a medical supply company and a real estate holding company can potentially aggregate the supply company and the real estate entity. The medical practice stays out.

There is a narrow de minimis exception. A business earning less than 10% of its gross receipts from SSTB activities (less than 5% if gross receipts exceed $25 million) is not classified as an SSTB at all. A construction firm generating 3% of its revenue from occasional consulting would clear this threshold and remain eligible for aggregation.⁴

SSTBs also face their own separate phase-out. Once taxable income exceeds the upper end of the phase-in range, the Section 199A deduction for an SSTB disappears entirely. The classification is doubly punishing at high incomes: the business can’t be aggregated with your other entities, and its own deduction vanishes.

The Three Numbers You Need From Each Business

Before anything hits the return, gather three figures from each business in the proposed group.

Qualified Business Income

QBI is net income from the business after ordinary and necessary deductions. It excludes investment income like capital gains, dividends, and interest not tied to operations. Each entity’s QBI should reconcile with its net profit or loss on the tax schedules. A loss from one aggregated business reduces the group’s combined QBI, which is one reason aggregation isn’t always a win: a persistent loss entity can drag down the pooled deduction.⁵

W-2 Wages

Total W-2 wages paid by each entity during the calendar year come from payroll records. When an employee works across multiple aggregated entities, you allocate their wages accordingly, and that allocation needs to hold up if questioned.

UBIA of Qualified Property

UBIA is the original cost basis of tangible depreciable property (equipment, vehicles, buildings) still within its applicable recovery window. An asset contributes to UBIA for the longer of 10 years from the date placed in service or the end of its full recovery period under standard depreciation.⁶

So commercial real estate with a 39-year recovery period contributes for the full 39 years, while a 5-year piece of equipment still contributes for 10 years rather than 5. These values come from your depreciation schedules and fixed asset registers. Missing assets that are still inside their window directly shrinks your deduction cap.

Filing the Aggregation Disclosure

Individuals claim the Section 199A deduction on Form 8995-A and report aggregation elections on Schedule B of that form. Schedule B has to be completed before the rest of Form 8995-A.⁷

For each business in the group, Schedule B requires:⁸

Legal name and EIN of each entity.
Description of each trade or business and the operational ties that justify grouping them.
QBI, W-2 wages, and UBIA contributed by each individual business.
Changes to the group, including any business formed, acquired, sold, or shut down during the year.

The totals from Schedule B flow into the main Form 8995-A, where the combined figures drive the deduction. The description of operational ties is where you show the two-of-three relationship tests are met. “Related businesses” won’t cut it. Name the shared accounting system, the common warehouse, the specific coordination between entities.

Partnerships and S Corporations

Partnerships and S corporations don’t file Form 8995-A themselves, because the deduction is claimed at the individual level. Instead, the entity attaches an aggregation statement to each owner’s Schedule K-1 identifying every trade or business in the aggregation, along with the name and EIN of each entity involved.⁷ Owners then use that information on their own Form 8995-A. If a pass-through fails to provide the statement, the IRS can disaggregate the businesses and impose a three-year ban on re-aggregating.³

Consistency: You’re Locked In

Once you aggregate, the regulations require consistent reporting in all later years. You can’t aggregate one year, disaggregate the next for a temporary advantage, then re-aggregate. The IRS treats aggregation as a structural election, not an annual optimization tool.³

You can add a newly created or acquired business to an existing group if it meets the same ownership and relationship tests. Update Schedule B that year to include its name, EIN, and figures.

The consistency rule also means you cannot elect to aggregate on an amended return. If your original return didn’t aggregate, you’ve missed the window for that year. The decision to aggregate has to be made before filing, not after you realize you left money on the table.³

Disaggregation is allowed when facts change materially: selling one of the businesses, ownership dropping below 50%, or the operational relationship no longer holding. Remove the entity from the group and update the disclosure.

What Happens If the Aggregation Fails

If the IRS disaggregates your businesses, it recalculates the deduction for each entity separately. Where the combined deduction beat the sum of individual deductions, you owe the difference plus interest.

The harder consequence is the three-year lockout. When the IRS disaggregates, whether because the required disclosure was missing or because the eligibility requirements weren’t actually met, you cannot re-aggregate those same businesses for the next three tax years.³ Three years of reduced deductions with no fix available.

The most common audit triggers are weak documentation of the relationship tests and incorrect UBIA. If you claim shared centralized functions, keep the evidence: shared software licenses, joint service agreements, employees on multiple payrolls. If you claim coordinated operations, be able to describe the actual supply chain or workflow. The paperwork you keep before filing counts for more than anything you can reconstruct after the IRS starts asking.

1
Office of the Law Revision Counsel. 26 USC 199A – Qualified Business Income
2
Internal Revenue Service. Revenue Procedure 2025-32
3
eCFR. 26 CFR 1.199A-4 – Aggregation
4
eCFR. 26 CFR 1.199A-5 – Specified Service Trades or Businesses and the Trade or Business of Performing Services as an Employee
5
Internal Revenue Service. Qualified Business Income Deduction
6
eCFR. 26 CFR 1.199A-2 – Determination of W-2 Wages and Unadjusted Basis Immediately After Acquisition of Qualified Property
7
Internal Revenue Service. Instructions for Form 8995-A
8
Internal Revenue Service. Schedule B (Form 8995-A) – Aggregation of Business Operations