Owner of 3 S-Corps Saves $67K with QBI Aggregation and Cross-Entity Planning

The Problem

This client owned and operated three S-Corporations: a staffing agency ($2.1M revenue), an IT services firm ($1.4M revenue), and a corporate training company ($700K revenue). Each entity had its own payroll, bank accounts, and tax return, but there was no coordination between the entities on compensation, retirement plans, or the Section 199A QBI deduction. The client was paying officer compensation in all three entities totaling $310,000, and each entity was filing its own Form 1120-S independently.

The lack of coordination created three problems. First, the QBI deduction under IRC §199A was being calculated separately for each entity, and the W-2 wage limitation was binding on the training company where wages were low relative to income. Second, the client had no retirement plan in any entity despite combined net income exceeding $800,000. Third, the management overhead of running three separate payrolls, three sets of books, and three tax returns was costing $28,000 per year in accounting and compliance fees.

AE Tax Strategy

1. QBI Aggregation Election Under Treas. Reg. §1.199A-4

We filed the QBI aggregation election under Treas. Reg. §1.199A-4, which allows taxpayers to treat multiple qualified businesses as a single trade or business for purposes of applying the W-2 wage and UBIA limitations. Because all three businesses shared common ownership (100%), centralized management, and were in related lines of service, they qualified for aggregation. This pooled $310,000 in W-2 wages across the combined QBI of $680,000, ensuring the 50% W-2 wage limitation ($155,000) did not restrict the 20% QBI deduction ($136,000). Without aggregation, the training company's QBI deduction was reduced by approximately $18,000 due to insufficient W-2 wages in that entity alone.

2. Cross-Entity Management Fee Structure

We established a management company (the staffing S-Corp served as the management entity) that charged arm's-length management fees to the other two entities for shared services including HR, accounting, IT infrastructure, and office space. This consolidated $180,000 in expenses into a single entity, simplified compliance, and allowed strategic allocation of income across entities to optimize the overall tax position. The management fees were documented with written agreements and transfer pricing analysis to satisfy IRC §482 requirements for related-party transactions.

3. Consolidated Defined Benefit + 401(k) Plan Under IRC §401(a) and §414(b)

We implemented a single defined benefit plan and 401(k) through the management entity, covering the owner as an employee of the controlled group under IRC §414(b). The 401(k) deferral of $23,500 plus employer match of $46,250 combined with a defined benefit plan contribution of $78,000 sheltered $147,750 from current taxation. At the client's marginal rate of 35% federal (no state income tax in Texas), this produced $49,000 in annual income tax savings while building substantial retirement wealth.

Before & After Comparison

Tax Category	Before	After	Savings
QBI Deduction Improvement	$18,000	$0	$18,000
Retirement Plan Tax Savings	$0	$49,000	$49,000
Total	$67,000	$0	$67,000

Key Takeaways

• The QBI aggregation election under Treas. Reg. §1.199A-4 can rescue QBI deductions lost to the W-2 wage limitation when individual entities have insufficient wages relative to income.
• Multi-entity business owners should evaluate whether a management company structure simplifies compliance and creates opportunities for strategic income allocation.
• Controlled group rules under IRC §414(b) require careful planning — they can work for or against you depending on retirement plan design and employee demographics.
• Cross-entity management fees must be at arm's length with written agreements to withstand IRS scrutiny under IRC §482.