Working with entrepreneurs can be one of the most exciting areas of tax, as these taxpayers arguably have the most tax-planning strategies available to them. A common deduction claimed by entrepreneurs or small business owners is the Qualified Business Income (QBI) deduction. Generally, it allows 20% of qualified business income to be deducted on the taxpayer’s individual return.
At Brass Tax, we work with thousands of tax professionals, and all our instructors review complex returns for other tax offices. One of the most common missteps we see comes from the QBI deduction. The deduction is often viewed as “easy enough” to claim, with preparers simply accepting any deduction the software calculates below 20% as an unavoidable limitation.
General Limitation on QBI
Taxpayers with qualified business income under specified thresholds ($201,775/$403,500 (MFJ) for 2026) should get their full 20% of QBI deduction, though they will be limited if their taxable income is less than their qualified business income. However, as the taxpayers’ income exceeds these thresholds, we need to determine if the deduction will be limited by the following circumstances:
- The business generating the QBI is an SSTB
- The business generating the QBI is NOT an SSTB and:
- 20% of QBI exceeds 50% of the wages paid by such business, or
- 20% of QBI exceeds 25% of the wages paid by such business plus 2.5% of UBIA in depreciable property
Consider a single taxpayer who receives an S corporation K-1 showing $600,000 of QBI, but only $150,000 of wages paid to the shareholder. Assume no other wages are paid and that the S corporation is not operating an SSTB. A straight 20% of QBI would generate a deduction of $120,000; however, the taxpayer’s income fully exceeds the phaseout thresholds, which means that the taxpayer will now be limited to 50% of wages paid, resulting in a QBI deduction of only $75,000.
Sometimes, this is just the way of the world. In this instance, however, planners should consider whether $150,000 constitutes reasonable compensation to the shareholder. In a case like this, a $20,000 increase in wages would result in additional payroll taxes of approximately 15.3%, increasing tax by $3,060, but generating an additional QBI deduction of $10,000, creating an additional tax savings of $3,700 (at a 37% income tax bracket). The increase in payroll tax will result in a net tax benefit of approximately $600.
The balancing act of managing reasonable compensation while maximizing the QBI deduction is a fine line to ride. As the taxpayer’s reasonable compensation exceeds the Social Security wage base, the savings from pushing toward the higher end of the reasonable compensation spectrum become more pronounced (since the only increase in FICA comes from the Medicare component). In an ideal world where taxpayers are actively working with their advisors, this strategy is helpful, but there is a risk in simply increasing the shareholder’s wage to the higher end of reasonable compensation. The bigger wage increases payroll tax and reduces the amount of QBI eligible for the deduction, potentially undermining the overall benefit.
As a result, taxpayers and their advisors should strongly consider whether they can aggregate different trade or business activities for QBI purposes to increase the amount of QBI eligible for the deduction, or to increase the amount of wages and UBIA, thereby increasing the QBI limitations without incurring additional tax liability.
Rules for QBI Aggregation
Taxpayers may elect to aggregate two or more businesses if all of the following requirements are satisfied:
- The same person or group of people, directly or indirectly, own 50% or more of each trade or business for a majority of the tax year
- Each business uses the same tax year (ignoring short years)
- None of the businesses are SSTBs
- Two of the three integration factors are met:
- Businesses provide products, property, or services that are the same or are normally offered together
- They share facilities or centralized business elements (employees, accounting, legal, manufacturing, purchasing, HR, IT, etc.)
- They are operated in coordination with or reliance upon one or more of the other businesses
Let’s return to our previous example of the taxpayer with $150,000 of compensation and $600,000 of QBI passing through on the S corporation K-1 and add additional facts to illustrate the benefits of aggregation. Assume that our taxpayer’s primary business is selling real estate and that they also recently started a second business selling insurance from the same office they use for real estate sales. The insurance business has 3 employees, each paid $60,000, and it breaks even this year. Can we aggregate the businesses for QBI, and what will be the result?
The taxpayer’s real estate brokerage and insurance business are both wholly owned by the taxpayer, so common control is met. Each business operates on a calendar year, and neither is an SSTB. SSTB classification is trickier than it sounds: several businesses that sound like textbook SSTBs are explicitly carved out by the regulations and several that sound perfectly safe are not (it’s counterintuitive enough that we devote a substantial block of our 2026 Tax Toolbox seminar to it). With both businesses clearing the SSTB hurdle, we move on to the integration factors. This is where things get interesting, as there is little guidance on this issue and few, if any, legal decisions.
Integration Factor Analysis
- Are these products or services the same or customarily offered together? While we’re sure everyone could agree that these products and services are not the same, we could also agree that someone purchasing a home will need insurance. Are they customarily offered by the same provider? Perhaps not. The lack of guidance in this area is problematic, but it does leave room for the taxpayer to make the argument that, because the end purchaser will need insurance after purchasing a home, the two are customarily offered together, albeit by different providers.
- Do they share facilities or centralized business elements (employees, accounting, legal, etc.)? Note here that the rule provides an “or” statement. While these businesses do not share any centralized elements other than a common owner, they do share a facility, and that is sufficient to meet this factor.
- Do they operate in coordination with or reliance upon one another? If the insurance business obtains the majority of its customers through the real estate brokerage business, that would meet the reliance portion of this factor. Keep in mind that this factor also contains an “or” statement, which means that the simple coordination between the two businesses could be sufficient to meet this factor.
For this set of facts, the taxpayer could argue that all three factors are met, though only two are required. Even if the IRS disagrees with the interpretation of one of the factors, the other two would be sufficient to allow for the aggregation of these businesses.
Thus, aggregating the two activities would result in $330,000 in wages ($150,000 from the real estate brokerage and $180,000 from insurance). This would increase the 50% limitation on QBI to $165k, allowing the full $120,000 of QBI to be deductible on the return. In this instance, the aggregation of these activities results in a net tax benefit to the taxpayer of $16,650 at the top marginal rate of 37%.
Examples of Missed Aggregation Opportunities
As we mentioned earlier, the instructors at Brass Tax Presentations regularly review complex returns both with their own clients and in consultation with other practitioners. We find that roughly one-quarter of the returns we review that claim QBI contain errors in SSTB classification or missed aggregation opportunities. Here are a few of the biggest missed opportunities we’ve seen in the last few months:
- A taxpayer who owned an aerospace manufacturing business and an aerospace repair business failed to aggregate the activities, resulting in over $100,000 of missed tax savings.
- Taxpayers who actively managed real estate failed to aggregate their properties — doing so would have increased UBIA and unlocked thousands, or tens of thousands, in additional tax savings.
- A taxpayer who operated a business that provided services for research and testing of medical devices that also owned a separate business selling the same medical devices. This was a double whammy because not only were the businesses not aggregated (which would have greatly benefited the taxpayer), the prior practitioner had assumed that research and testing of medical devices was an SSTB when, in reality, that activity is explicitly excluded from the field of health.
The Full Picture
With the QBI deduction made permanent by the One, Big, Beautiful Bill Act, practitioners can no longer avoid its immense complexity. Practitioners working with business owners must obtain a strong working knowledge of the limitations, definitions, and exceptions of SSTBs, as well as the requirements for electing to aggregate trades or businesses. High-income self-employed individuals are hot clients in the era of advanced tax planning. Missed deductions often lead clients to switch to preparers who catch these issues, even if those preparers charge twice as much as you do.
If you want to be on the winning end of this client migration to high-end tax advisors, join us for the 2026 Tax Toolbox seminar, where we’ll spend 8 hours diving deep into QBI, retirement plans, tax credits, and so much more.