OVERVIEW
If your work qualifies you for certain business deductions on your taxes, you may need to use Form 8995.
The Qualified Business Deduction (QBI)
The Qualified Business Income Deduction, also know as the Section 199A deduction, allows owners of pass-through businesses to deduct up to 20% of their share of qualified business income. This measure that was created by the Tax Cuts and Jobs Act applies to a few common business structures including:
To claim the deduction on Form 1040, there are two potential tax forms. Form 8995 is the simpler option, but it's only available to taxpayers who qualify.
Who can take the pass-through deduction?
As a reminder, pass-through income is any business income that's counted on your personal income tax return, rather than on a business's tax return, and so isn't subject to business taxes. The pass-through deduction is generally available to business owners whose 2022 taxable income before the qualified business income deduction falls below $170,050 for single filers or $340,100 for married couples filing jointly. However, it comes with rules and limitations.
If you qualify to use the simplified form to claim the deduction, some of those limitations don't apply.
What is Form 8995?
Using the simplified form to claim the pass-through deduction can save a lot of paperwork. The expanded version of the form, 8995-A, has four sections plus four additional schedules, used to calculate the business's qualified business income, potential deduction phaseouts, and the resulting deduction.
Form 8995 is comparatively easy. It has just one page with 17 lines. You can use this pared-down version if your total taxable income before the qualified business income deduction falls at or below the threshold mentioned above and you're not a patron of an agricultural or horticultural cooperative. If your taxable income before the qualified business income deduction is above the threshold, or you're a patron of a cooperative, you must use the more complicated form.
For example, say you're a married taxpayer with a taxable income before the qualified business income deduction (line 15 of Form 1040) of $300,000. Since your income falls below the cut-off, you can claim the pass-through deduction using Form 8995. If, however, your taxable income before the qualified business income deduction was $350,000, you would need to use 8995-A instead.
Claiming the pass-through deduction on 8995
Although TurboTax will help you determine whether you qualify for the pass-through deduction and complete the necessary forms, it's useful to have a basic understanding of the information on your tax return. Here's an overview of the information that goes on Form 8995.
Lines 1-4: Qualified business income
Line 1 of the form includes lines to list up to five businesses and provide each business's Taxpayer Identification Number and qualified business income (or loss). On lines 2 through 5, you enter the total qualified business income, any qualified business loss carried over from your prior-year tax return and multiply the total by 20%.
Lines 6-10: REIT dividends and PTP income
If you received dividends from a real estate investment trust (REIT) or income from a publicly traded partnership (PTP), that income is also used to calculate your pass-through deduction. On lines 6 through 9, you enter your current year income from these types of investments, carryovers from the prior year, and multiply the total by 0.2 to find 20%.
Lines 11-15: Income limitation
If your total taxable income before the qualified business income deduction is less than $170,050 ($340,100 for joint filers) for 2022, your pass-through deduction is the lesser of:
- Your taxable income reduced by net capital gains
- Your qualified business income
Lines 11 through 14 ask you to provide your taxable income, net capital gains (usually the total of lines 3a and line 7 from your Form 1040), subtract net capital gains from your qualified business income, and multiply the result by 0.2 to find 20%. You enter the amount from line 10 or line 14, whichever is less. This is your pass-through deduction.
Lines 16-17: Loss carryforwards
If your net qualified business income is negative, then you have a qualified business loss. You can't claim a deduction on your current year's return, but you will carry the loss forward to the following year. Lines 16 and 17 are used to calculate the loss you'll carry forward.
Fortunately, you don't have to know all of the rules and limitations or worry about entering the right numbers on the right forms when claiming the pass-through deduction on your own.
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