Using Form 8995 To Determine Your Qualified Business Income Deduction

qualified business income
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Did you read the title and think, “what is Form 8995?” If you did, you aren’t alone. This is a relatively new IRS form for claiming pass-through deductions on your qualified business income (QBI).

In addition to Form 8995, the IRS also has Form 8995-A containing four sections and an additional four schedules. This form is what you use to calculate your qualified business income, potential deduction phaseouts, and the resulting deduction.

Sound complicated? In 2020 the IRS assessed around $6 billion in employer penalties for business income tax miscalculations or missing payments.

Don’t become an IRS statistic. Keep reading our qualified business income guide to learn how Form 8995 helps determine your qualified business income deduction (QBID).

What Is Qualified Business Income?

The Tax Cuts and Jobs Act (TCJA) of 2017 allow qualifying pass-through income business owners to deduct up to 20% of their share of qualifying income on business taxes. The deduction is equivalent to Section 199A.

The Act allows business entities that are sole proprietorships, partnerships, limited liability companies (LLCs), and S corporations to receive this tax reduction. You claim the deduction on Form 1040 by using Form 8995 or Form 8995-A.

The IRS considers a qualified trade or business to be any § 162 business or trade, with three exceptions: 

  • C corporations are ineligible because the corporate income is taxed separately from the owner
  • Services you handle as an employee are ineligible
  • Specified services trades or business (SSTB) exceeding the income threshold are ineligible

The primary asset of an SSTB is the reputation or skill of the employees or owner. Those SSTB businesses include athletics, consulting, health, law, performing arts, or trading. Those businesses may qualify for a deduction of up to 20% if their income is at or below the threshold.

What Is Pass-Through Income?

A business’s income counted on an owner’s income tax return rather than their company tax return is pass-through income. This is income that is not subject to business taxes.

For 2022, business owners with income

  • Lower than $170,050 when filing single, head of household with pass-through business, or Married filing separately, or
  • Lower than $340,100 for married couples filing jointly

before qualifying business income deductions, meet the requirements. There are some limitations, but those do not apply to owners qualifying for Form 8995.

Form 8995 vs Form 8995-A

Form 8995 and 8995-A are recent IRS additions that you must attach to your tax return if claiming a QBI deduction. These forms were not necessary when filing tax returns before 2019.

Form 8995

Form 8995 is relatively easy; it is one page with 17 lines. This simple version is the best choice if your total taxable income is at or below the pass-through income levels. You may not participate if you patronize horticultural or agricultural cooperatives.

Follow these steps for form 8995:

On line 1, list up to five businesses, including each company’s taxpayer identification number and qualified business income or loss. Enter qualified business income on lines 2-5 and any business loss carryover from the prior year’s tax return, then multiply the total by 20%.

Lines 6-10 deal with any dividends or income you receive from a real estate investment trust (REIT) or a publicly traded partnership (PTP) when calculating your pass-through deduction. Enter your current year’s income from all investments, including carryovers from the previous year. You then multiply the total by 0.2 to determine 20%.

Your income limitation calculations take place on lines 11-15. If your taxable income before deducting your qualified business income is less than the pass-through income figures above, your pass-through deduction is either:

  • Your qualified business income, or
  • Your taxable income after your net capital gains reduction

Your passable income is whichever of these two figures is lower.

On lines 11-14, you will need to show your taxable income and net capital gains. Subtract your net capital gains from your qualified business income, then multiply the answer by 0.2 to determine 20%.

You enter that amount on line 10 or 14, whichever is less. This is your pass-through deduction.

Lines 16-17 deal with loss carryforwards. You can carry that loss forward to next year by calculating the amount you can carry over using lines 16-17. You cannot claim a deduction on this year’s return if you have a negative qualified business income.

Form 8995-A

Form 8995-A is an expanded version of form 8995. It contains four sections and four schedules for calculating qualifying income for the business. Using Form 8995-A is necessary if your income is above the passable income level or if you are an agricultural or horticultural cooperative patron. 

Depending on your business situation, you must complete Schedule A, B, or C on Form 1040 before beginning Form 8995-A.

  • Schedule A is for reporting itemized deductions
  • Schedule B is for reporting interest and ordinary dividends
  • Schedule C is for reporting profit or loss for sole proprietors.

We have experience helping businesses with their applicable business payroll deductions. Form 8995-A has additional requirements for conducting extensive calculations. Contact ERC Today for assistance to ensure your calculations and deductions are accurate. 

Qualified Business Income Thresholds

To qualify for a full deduction, you must do these three things: 1) meet the income threshold shown above, 2) own a QBID business structure, and 3) have a business income that falls below the threshold for your filing status.

If your income exceeds the threshold, you may still qualify. To qualify, you need to meet additional IRS criteria for determining whether you may take a partial deduction.

If your 2022 taxable income is over $440,100 for married filing jointly or $220,050 for all other filing statuses, your deduction phases out. A phase-out is the slow reduction of tax credits when income is approaching the upper qualifying limit.

Some trades, including accountants, doctors, lawyers, and performers, will not qualify for QBI if their income exceeds the threshold.

If you are not from an excluded profession and your income is higher than the threshold, you may be eligible but must file using Form 8995-A.

QBI Deduction Excluded Income

The following types of income do not qualify for a pass-through deduction:

  • Annuities that do not relate to your business
  • Dividends or capital gains or losses
  • Foreign market gains and losses
  • Income not generated by U.S.-run businesses
  • Interest income that does not relate to the business
  • Notional principal contract income, deductions, or loss
  • Wage income

You must exclude all income from the above when calculating our deduction.

Use Caution When Calculating

It is possible to calculate your QBI eligibility on your own, but you must be cautious. Make sure you do not miss potential savings opportunities or make overcalculation errors. Errors can result in you needing to redo your taxes or pay penalties.

Before completing Form 8995, report your company’s income and expenses on Schedule C. You can then write your adjusted gross income on Form 1040. You can take the QBI even if you do not itemize or take a standard deduction.

IRS procedures for accurately calculating taxes and deductions are complicated, and mistakes are costly. Concentrate on your business and avoid penalties by getting professional help.

Get the Tax Help You Need

If your mind is swirling with the idea of making an accurate calculation, you can get off that merry-go-round by calling ERC Today.

Our business tax professionals can determine your qualifying tax savings and prepare your Form 8995 qualified business income deduction. Call (313) 616-1557 today to begin the process.

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