Love the tax break: Using IRS Form 8995 to calculate your QBI deduction

How to Claim the Qualified Business Income Deduction in 2023

If you’re a small business owner or a self-employed individual, you may be eligible for a tax break that can save you up to 20% of your qualified business income (QBI). This deduction, known as the QBI deduction or Section 199A deduction, was created by the Tax Cuts and Jobs Act of 2017 and is available for tax years 2018 through 2025. In this article, we’ll explain what the QBI deduction is, who can claim it, how to calculate it, and what forms you need to file.

What is the QBI deduction?

The QBI deduction is a way to lower your taxable income by deducting up to 20% of your net income from a qualified trade or business. A qualified trade or business is any business that is not a C corporation, such as a sole proprietorship, partnership, S corporation, or LLC. The QBI deduction also includes 20% of your qualified REIT dividends and qualified publicly traded partnership (PTP) income.

The QBI deduction is not an itemized deduction, so you can claim it even if you take the standard deduction. However, the QBI deduction is subject to some limitations based on your taxable income, your type of business, and your wages and property. We’ll discuss these limitations in more detail later.

Who can claim the QBI deduction?

You can claim the QBI deduction if you meet the following criteria:

• You have QBI, qualified REIT dividends, or qualified PTP income or loss;
• Your taxable income before your QBI deduction is less than or equal to $170,050 if single, married filing separately, head of household, qualifying surviving spouse, or are a trust or estate, or $340,100 if married filing jointly; and
• You are not a patron in a specified agricultural or horticultural cooperative.

If your taxable income exceeds these thresholds, you may still be able to claim a partial QBI deduction, but you will have to use Form 8995-A instead of Form 8995. Form 8995-A has more complex rules and calculations that depend on whether your business is a specified service trade or business (SSTB) or not. An SSTB is a business that provides services in fields such as health, law, accounting, consulting, financial services, performing arts, athletics, brokerage services, investing and investment management, trading, dealing in securities, or any business where the principal asset is the reputation or skill of one or more of its employees or owners. SSTBs are subject to lower income thresholds and phase-out rules for the QBI deduction.

How to calculate the QBI deduction?

To calculate your QBI deduction using Form 8995, you need to follow these steps:

1. Fill out Part I to determine your QBI component for each trade or business. You need to enter your net income or loss from each business on line 1. If you have more than one business, you need to attach a statement showing the calculation for each one. You also need to enter any qualified REIT dividends and qualified PTP income or loss on line 2. Then add lines 1 and 2 and enter the result on line 3. If line 3 is zero or less, enter zero on line 4 and skip to Part IV. Otherwise, multiply line 3 by 20% (0.2) and enter the result on line 4.
2. Fill out Part II to determine your taxable income limitation. You need to enter your taxable income before your QBI deduction on line 5. This is the amount from Form 1040 line 15 minus any capital gain reported on Schedule D line 13. Then enter your net capital gain on line 6. This is the amount from Schedule D line 16 plus any capital gain distributions reported on Form 1040 line 7a. Subtract line 6 from line 5 and enter the result on line 7. Then multiply line 7 by 20% (0.2) and enter the result on line 8.
3. Fill out Part III to determine your QBI deduction. Compare line 4 and line 8 and enter the smaller amount on line 9. This is your QBI deduction before any cooperative reduction.
4. Fill out Part IV to determine your cooperative reduction, if any. If you received any domestic production activities deduction (DPAD) from a cooperative, enter it on line 10. Then multiply line 10 by 9% (0.09) and enter the result on line 11. Subtract line 11 from line 9 and enter the result on line 12. This is your QBI deduction.

Here’s an example of how to fill out Form 8995 using some hypothetical data:

Let's say you have two businesses: a bakery and a flower shop. 
Your net income from the bakery is $50,000 and your net loss from the flower shop is -$10,000. 
You also have $5,000 of qualified REIT dividends and $2,000 of qualified PTP income. 
Your taxable income before your QBI deduction is $80,000 and your net capital gain is $15,000.

To calculate your QBI deduction, you need to do the following:

– Fill out Part I to determine your QBI component for each trade or business. You enter $50,000 on line 1a for the bakery and -$10,000 on line 1b for the flower shop. You attach a statement showing the calculation for each business. You enter $5,000 on line 2a for the REIT dividends and $2,000 on line 2b for the PTP income. You add lines 1 and 2 and enter $47,000 on line 3. Since line 3 is more than zero, you multiply it by 20% (0.2) and enter $9,400 on line 4.

– Fill out Part II to determine your taxable income limitation. You enter $80,000 on line 5. This is your taxable income before your QBI deduction. You enter $15,000 on line 6. This is your net capital gain. You subtract line 6 from line 5 and enter $65,000 on line 7. Then you multiply line 7 by 20% (0.2) and enter $13,000 on line 8.

– Fill out Part III to determine your QBI deduction. You compare line 4 and line 8 and enter the smaller amount on line 9. In this case, it’s $9,400. This is your QBI deduction before any cooperative reduction.

– Fill out Part IV to determine your cooperative reduction, if any. In this example, you didn’t receive any DPAD from a cooperative, so you enter zero on line 10. Then you multiply line 10 by 9% (0.09) and enter zero on line 11. You subtract line 11 from line 9 and enter $9,400 on line 12. This is your QBI deduction.

Your Form 8995 would look something like this:

You can claim $9,400 as your QBI deduction on Form 1040 line 13. Make sure to attach Form 8995 to your tax return.

Hope this information has been valuable to you. Thanks for reading!