QBID for STTP and non=STTP businesses

[matthanson646]

I have a sole-prop financial planning/investment business - which I assume is classified as a STTP entity for QBI purposes.  I am also sole owner of a S-corp that covers many of the related expenses for my sole-prop (explanation at bottom of post).  Basically, I receive income through my sole-prop and pay a ~$12,000 monthly contracting fee paid to the S-corporation.   The S-corp pays expenses such as rent, insurance, and most significantly PAYROLL.  Prior to my wife retiring out income level put us over the QBI phase-out so was never an issue.  Starting in 2026 we will likely be below the phase=out range to be eligible for QBI deductions.   I am trying to determine what our eligibility will be for the QBI deduction going forward and if I should make any changes to my business structures going forward.

Based on a quick overview of the 8995-A rules, it sounds like non-STTP businesses and STTP business cannot be aggregated when determining the QBI deduction.   So, in my case since the wages are paid out of the non-STTP s-corp which has minimal income, and the bulk of income is earned through my sole-prop (which has no wages) will there be an issue when it comes to the QBI deduction?  If that is the case will moving payroll over to my sole-prop help me become eligible for the QBI deduction?  Keep in mind that total income will be below the phase-out on our tax return (not sure if that matters when business is STTP), and the only capital basis I have in my sole-prop is amortizable expenditures (goodwill).

FWIW, the reason the s-corp exists is due to a succession plan where I had a partner who was selling ownership of the financial planning business to me over several years.  To efficiently allocate expenses to we decided it would be easiest for us to each pay a certain monthly fee to a jointly owned S-corp that would then cover our shared expenses.  The S-corp income was kept to a few thousand dollars per year so not significant.  Since I now own the bulk of the financial planning business I have become the sole owner of the S-corp and I am the only person who pays expenses to it.  The S-corp is a bit redundant at this point, though I am holding onto it for now to potentially use in my own succession plan.

Appreciate any insight that can be provided in terms of the QBID eligibility question.

Thanks!

[ThomasM125]

If your income is below the phase out income level of $197,300 for single filers or $394,600 for married filing joint, it won't matter which entity the income is reported on. That is because there is no limitation on the QBI deduction based on income even if you are a Specified Service Trade or Business (SSTB), if you are below the income threshold. Otherwise, you may face a limit on your deduction based on your income.

It is likely the IRS would see through your attempts to manipulate your deduction by transferring deductions from one entity to another. As a rule, they will deny tax benefits when there is no sound business purpose for structuring things as you suggest, where the main purpose may be to evade taxes. Even if you paid the wages out of our sole-proprietorship to then prop up the income of the S corporation, the IRS would likely consider it's income SSTB like that your sole-proprietorship, since you own both entities and you are involved in an SSTB.