Introduction
Did you know?
As a small business owner, you can deduct up to 20% of your pass-through income by just filling up Form 8995 and claiming a qualified business income deduction (QBID).
But most small businesses don’t know about QBI deduction, Form 8995 instructions, etc. That’s why we provide here a complete guide on the QBI deduction.
Let’s know more about QBID, Form 8995, its purpose, eligibility, and how it is different from Form 8995-A.
What is Form 8995?
Form 8995 is the IRS tax form that sole proprietors, partnerships, LLCs, and S corporations fill up to claim the qualified business income (QBI) deduction, also known as the pass-through deduction or Section 199A deduction.
The 14% decrease in corporate tax rate due to the Tax Cuts and Jobs Act (TCJA) in 2017 led to the creation of the QBI deduction.
However, only C-corporations, representing 5% of small businesses, benefited from this tax reduction. Sole proprietorships and LLCs did not see any advantages from the TCJA. Therefore, Legislators introduced QBID to address the lack of tax benefits for businesses aside from C-corporations.
Your qualified business income before your QBI deduction is less than or equal to $191,950 as a sole proprietor in 2024, then the IRS permits you to deduct your taxable income by 20%, then the taxable income for the year 2024 will be 153,560.
So, how do you claim the 20% QBI deduction? -By filling out Form 8995.
If you are a small business owner or self-employed individual, then fill out an Individual Income Tax Return (Form 1040) to get the QBI deduction. You must use Form 8995 or Form 8995-A to claim a pass-through deduction. You may ask the difference between the two. Let’s understand that first.
What is the key difference between Form 8995 and Form 8995-A?
Form 8995 is a simple one-page document that most taxpayers claiming the QBI deduction will only need to complete.
Form 8995-A is for a smaller group of high-income individuals. It is more detailed, and complex compared to Form 8995. In addition to the basic information, you must fill out four detailed sections and schedules to help calculate your deduction.
However, you must complete certain eligibility criteria to fill out these forms, which can be described below.
What are the qualifications for QBI deduction?
The eligibility to fill up Form 8995 depends on the qualifications of the business structure and the type of income you have. There is also the income threshold for getting a QBI deduction, which your income needs to maintain. Let’s know more in detail about these qualifications one by one.
Business Structure Qualification for QBID
To qualify for the QBI deduction, you need to have ownership in one of these pass-through business types:
- Sole Proprietorships
- Partnerships
- LLCs
- S-Corporations
- Trusts
- Estates
- Agricultural or Horticultural Cooperatives (using Form 8995-A)
Income Type Qualification for QBID
Only specific income types are allowed on Form 8995. This includes taxable earnings from:
- Pass-through business income
- Dividends from qualified REITs (Real Estate Investment Trust)
- Income or loss from a qualified PTP (Publicly Traded Partnership)
- Rental real estate
Income Threshold for QBID
To qualify for the QBI deduction, pass-through business owners must meet the income threshold.
For the 2024 tax year, the income threshold is $383,900 for married couples filing jointly and $191,950 for singles, married couples filing separately, and heads of household who own a pass-through business.
If you meet the business structure requirements and your business income is below the limit for your filing status, you may be eligible for the full deduction. The IRS has additional criteria to determine if you qualify for a partial deduction if your income exceeds the threshold.
The QBI deduction phases out if your income in 2024 is between $191,951 to $241,950 for single filers and $383,901 to $483,900 for married couples filing jointly.
Keep in mind that if you earn more than the limit and work in certain professions like a lawyer, accountant, actor, or doctor, you may not qualify for the QBI deduction.
If your income exceeds the threshold, and you're not in one of the excluded professions, then you may still be eligible. You will just be required to fill out Form 8995-A.
Which type of income will be excluded due to ineligibility for deduction?
Exclude these income types from your deduction calculation, as they don't qualify for the pass-through deduction. Some examples include:
- Dividends or Capital gains
- Interest Income Unrelated to Business,
- Interests not related to Business
- Annuities not related to Business
- Wages
- Revenue from non-US based company
- Profits or Losses in foreign market
- Income, Loss, and Deductions from notional principal contracts
How to claim a pass-through deduction?
Check if you qualify for QBI and calculate your savings. You must avoid missing out on savings or correcting your taxes because of a mistake.
First, you need to complete Form 8995 and qualify for the QBI deduction. Then, report your business income and expenses on Schedule C, and your adjusted gross income on Form 1040. Remember, you can deduct this amount whether you add up or take the standard deduction.
You need to be aware of the pass-through deduction and its impact on your savings for easier tax filing. Let's explore how to fill out Form 8995 and calculate your pass-through deduction.
1. Lines 1-4
Your business name, taxpayer ID number, and qualified income or loss for the tax year must be listed on Line 1 of Form 8995.
Then, on Line 2, write down the total qualified business income or loss of the organizations listed on Line 1.
If there is a net business loss from the previous year, note it on Line 3.
Then, add the numbers from Lines 2 and 3 to determine the total carry forward and income/loss for the current year on Line 4.
Finally, in line 5, multiply the amount for Line 4 by .20 to get 20%.
2. Lines 6-10
Lines 6 through 10 cover your income from publicly traded partnerships (PTPs) and real estate investment trusts (REITs). First, list your current year's earnings from these investments. Then, add them to any remaining income from the previous year and multiply the total by 0.2 to get the 20% figure.
3. Lines 11-15
The income threshold is on lines 11 to 15. If your taxable business income in 2024 is less than $191,950 (or $383,900 for joint filers) before the pass-through deduction, your QBI deduction is the lesser of 20% of:
- Your taxable income less your net capital gains, or
- Your qualified business taxable income.
On Lines 11-12, enter your available business income and net capital gains (the amount of Line 3a and Line 7 on your Form 1040).
Then, subtract your net capital gains from your qualified business income and write the result on Line 13.
After that, multiply the result from Line 13 by 0.2 to get 20% and write it on Line 14.
Finally, review Lines 10 and 14, and note the amount for the line with the lower value for Line 15.
That is your QBI deduction.
4. Lines 16-17
On lines 16-17, calculate your carryover loss. A qualified business loss occurs when your net qualified business income is in the negative.
You can apply it to reduce income in a profitable year later, but you cannot subtract it from your tax return for the current year.
How to get a pass-through deduction on side business?
If your side business is set up as a sole proprietorship, partnership, LLC, or another pass-through entity, and you pay self-employment tax, you might qualify for the QBI deduction.
For instance, if you earn $6,000 as a shopkeeper, you can deduct 20% i.e., $1,200. So pass-through deduction, your qualified business income comes to $4,800.
Remember, only your business income can be used for the deduction. You can deduct 20% of your side business income from your taxable business income, but it doesn't mean you can deduct that 20% from your total taxable income.
What to consider when filling out Form 8995?
Due to disputed deduction claims made by people looking to exploit the system, the IRS is reviewing its process for validating QBI deductions. Therefore, you should be updated on deduction rules when filling out Form 8995.
Get the Benefit of a QBI deduction with Virtue CPA
By just filling out Form 8995, you can take advantage of the pass-through deduction. But if you're struggling with how to fill out the form or have any other queries, then contact us.
At Virtue CPAs & Advisors, our tax experts are ready to help you, address your concerns, and ease your confusion about the complexities. We are one of the top taxation firms in Atlanta, USA with expertise in complex tax compliance and qualified experience in tax filing and deduction.
Schedule a call now for more information. form 8995
