Introduction

This article and video tutorials will cover the basics of the Section 199A deduction and how to complete the IRS Form 8995 or IRS Form 8995-A. View our YouTube videos for sample fact patterns and step-by-step instructions on completing the forms for various scenarios.  

The Qualified Business Income (QBI) deduction was added to the U.S. tax code in 2017 as part of the Tax Cuts and Jobs Act (TCJA) and provides tax relief for pass-through entities (partnerships and S corporations) and sole proprietors filing Schedule C with Form 1040.  

For additional guidance on other scenarios covering Form 8995, see our other pages & videos here:

Understanding the QBI Deduction

The QBI deduction allows qualifying individuals to deduct up to 20% of their net qualified business income (QBI) from certain pass-through entities and sole proprietorships. This deduction can significantly lower taxpayers’ taxable income and save them money. The intention behind the QBI deduction is to level the playing field with the 21% U.S. corporate tax rate. 

Qualifying for the QBI Deduction

To be eligible for the QBI deduction, you must meet specific criteria:

  1. Business Structure: You must operate a qualified business entity, which includes sole proprietorships, partnerships, S corporations, and some trusts and estates. Entities taxed as a “C” corporation are not eligible for the deduction.
  2. A Qualified Trade or Business. The taxpayer must be engaged in a qualified trade or business, which is every trade or business other than a:
    1. Trade or business of performing services as an employee; and
    2. A specified service trade or business (SSTB). However, it is essential to remember that an SSTB can still qualify as a trade or business eligible for the QBI deduction if the taxpayer’s income is below certain thresholds.
  3. Income Limitations: The deduction is relatively straightforward for taxpayers with taxable income below certain thresholds and doesn’t require certain phaseouts or other limitations. However, if taxable income exceeds these thresholds, other factors like the type of business, whether a Specified Service Trade or Business (SSTB), wages paid to employees, and the unadjusted basis of qualified property come into play. An overall limitation states that the QBI deduction cannot exceed 20% of the taxpayer’s taxable income reduced by net capital gains (if any).
  4. Specified Service Trade or Business (SSTB) Limitation: An SSTB is a trade or business involving the performance of services where the principal asset of the trade or business is the reputation or skill of 1 or more of its owners or employees. These fields include law, accounting, health, engineering, architecture, consulting, financial services, etc. An SSTB’s owner may face limitations on the QBI deduction if their taxable income exceeds the phaseout threshold. The phaseout thresholds change on a year-to-year basis.
  5. Limitations for W-2 & Unadjusted Basis of Assets (UBIA). If a taxpayer’s taxable income is above certain thresholds, the must reduce the QBI of each trade or business to the greater of 50% of W-2 pages paid, or 25% of the W-2 wages plus 2.5% of UBIA. If the company is an SSTB, taxpayers with taxable income exceeding the upper threshold will have no QBI deduction for their SSTB.     

Completing Either IRS Form 8995 or Form 8995-A

To claim the QBI deduction on your tax return, you must complete either IRS Form 8995 or 8995-A.  

The taxpayer uses Form 8995 (Simplified Computation) if taxable income before the QBI deduction is below the relevant thresholds for the filing year (for the 2022 tax year, the thresholds were $340,100 for Married Filing Joint (MFJ) and $170,050 for single filers). If the taxable income before the QBI deduction exceeds those thresholds, the taxpayer must use Form 8995-A instead of Form 8995. 

The Form 8995-A may also require the taxpayer to attach additional schedules.

  • Schedule A (Specified Service Trades or Businesses). Calculate limitations applicable to SSTBs. 
  • Schedule B (Aggregation of Business Operations). Under certain conditions, taxpayers can elect to aggregate two or more businesses. 
  • Schedule C (Loss Netting and Carryforwards). Used for carryforwards & to apportion QBI losses against QBI profits from other qualified businesses. 
  • Schedule D (Patrons of Agricultural or Horticultural Cooperations). 

Here’s a step-by-step guide on how to fill out Form 8995-A.  

Step 1: Basic Information

Step 2: Complete Part I 

  • Enter the name & TIN for each of your qualified trades or businesses on a separate line item. Indicate in the appropriate check boxes if the activity is an SSTB or you are making an aggregation election.  

Step 3: Enter your QBI, allocable W-2 & share of UBIA in Part II.

  • In this section, you’ll calculate your initial QBI deduction, which is 20% of your QBI. This section requires information from your Schedule K-1 (for partnerships and S corporations) or your Schedule C (for sole proprietorships filing Form 1040).  

Step 4: Complete Part III for Phased-in Reduction (if applicable)

  • Calculate the phased-in percentage to reduce your initial QBI deduction. Enter the amount of adjusted QBI after the phase-in reduction on Line 12 of Part I.  

Step 5: Report and Calculate Your Overall QBI Deduction

  • After completing Part III and lines 2 through 16 of Part II, enter the qualified business income component in Part IV. 
  • Part IV combines your qualified business income component with other QBI amounts from REIT or PTP income.
  • The overall limitation provides that the deduction cannot exceed 20% of the taxpayer’s taxable income reduced by net capital gains. 

Step 6: Report the Net QBI Deduction on Form 1040

  • An individual taxpayer reports their QBI deduction on page 1 of Form 1040, line 13 for the Qualified Business Income deduction.  

Conclusion

The Section 199A deduction provides tremendous benefits to owners of eligible businesses. Taxpayers should consult with a qualified tax professional to determine their eligibility. A professional can also help ensure you maximize your QBI deduction while complying with tax laws and regulations.