Entrepreneurs may not be content with owning a single business. They may have two or more companies going at the same time. They may own some or all of them by themselves or have co-owners. A 2022 Bank of America survey found that 26% of small business owners had multiple businesses, and of these 58% had 2 businesses and 30% had 3 businesses running at the same time. When there is common ownership, certain aggregation rules are triggered. Some results are favorable; others are not. For multiple C corporations, sometimes called controlled or affiliated corporations, special rules apply and are not discussed here. But for pass-through entities, here are tax issues that come up for aggregation.
First-year expensing
The dollar limit on write-offs for machinery and equipment in the year they’re placed in service–$1.22 million for 2024—applies at the owner level. Thus, if there are multiple businesses each using this expensing option, the owner may not be able to fully utilize all the deductions that are passed through.
Retirement plans
The limit on salary reductions for contributions to 401(k)s and SIMPLE-IRAs also applies at the owner level. For 2024, the 401(k) limit is $23,000, plus $7,500 if at least age 50 by the end of the year; the limit for SIMPLE-IRAs for 2024 is $16,000, plus $3,500 for older individuals. If multiple businesses owned by the same person offer these plans, the owner cannot exceed the salary reduction limit by having multiple plans.
The same is true for employer contributions to SEPs and other retirement plans. For example, if an owner has two S corporations and each has a SEP, each business can have a SEP. But the maximum contribution on behalf of the owner is limited to an annual amount—no more than $69,000 in 2024.
QBI deduction
For purposes of the 20% qualified business income (QBI) deduction for owners of pass-through entities, QBI is figured for each multiple pass-through business and then the amounts are netted. However, this rule doesn’t apply if an owner opts for “aggregation.” With the aggregation election, multiple pass-through businesses can be lumped together for purposes of applying the W-2 wage and UBIA-of-qualified-property deduction limit as long as at least one person in the ownership group has at least 50% ownership—directly or indirectly—in each business to be aggregated. An owner makes this decision regardless of what co-owners, if any, decide to do.
Employer mandate
In determining whether an owner is an applicable large employer (ALE) subject to the employer mandate and is required to provide health coverage to full-time employees or pay a penalty, all employees of multiple businesses are taken into account using the same rules that apply to retirement plans.
Hobby loss rules
If an activity is not engaged in for profit, losses (expenses in excess of revenue) are not currently deductible. Usually, when the hobby loss rule applies, losses are limited to the extent of income, but only as itemized deductions. What’s more, under current tax rules, even this limited write-off is barred at least through 2025. There’s no carryover for unused losses. But it’s possible to aggregate businesses to demonstrate a profit motive for a business that isn’t profitable so that losses can be taken.
In one case, Peter Morton, the founder of the Hardrock Café owned several S corporations engaged in various activities, including real estate, investments, entertainment, and gaming. One such corporation owned a Gulfstream-III jet that he used many times for business throughout the year. He deducted related expenses despite losses in the corporation that owned the aircraft; to him this corporation was a business and not a hobby (as the IRS argued). He maintained that all these corporations “facilitated [his] overall business: the maintenance, exploitation and expansion of the Hard Rock trademark and Peter Morton brand through cafes, hotel-casinos, and casinos.”
The Court of Federal Claims, in a refund suit, recognized the concept of a “unified business enterprise.” As such, his activities in the various corporations could be taken into account in determining a profit motive for the one that owned the aircraft. He didn’t need a profit motive for that particular corporation as long as the aircraft was used to further a profit motive in his overall business. All these entities were interrelated and it did not matter which entity he used to conduct any particular business.
Passive activity loss (PAL) rules
Losses from a business in which a person does not materially participate and all rental real estate activities are passive activities, and losses from them usually are limited to the extent of passive activity income. Unused losses carry over to future years and can be used to the extent of passive income at that time or when there’s a complete disposition of the activity. For purposes of the PAL rules, activities can be grouped if there is an appropriate economic unit. This can enable losses from an unprofitable activity to currently deductible as long as other activities in the group are profitable.
Final thought
Some of the aggregation rules related to taxation for multiple businesses are highly complicated. Business owners should be aware of when issues may exist so they can seek the advice of a tax professional.
Read more about multiple businesses in this blog here.
