Form 8995
Pass-through business profits or losses flow directly to your personal tax return (Form 1040). Some owners of these businesses may be eligible for a 20% deduction. To qualify, the IRS requires you to file Form 8995 or its expanded version, Form 8995-A. It has four extensive sections and schedules that help calculate your QBI deduction and possible deduction phaseouts.
The Tax Cuts and Jobs Act (TCJA) introduced a new benefit for small business owners: the Qualified Business Income Deduction. The deduction lets pass-through entities such as sole proprietorships, partnerships, and LLCs reduce their taxable business income by 20%. This is in addition to the lower corporate tax rate that the TCJA reduced. In order to take advantage of the QBI deduction, business owners must submit IRS Form 8995. However, not all businesses need to file this form. The form is only needed if a taxpayer’s 2022 total taxable income is above the $170,050 threshold for single filers or $340,100 for joint filers or if the taxpayer or any of their trades or businesses are SSTBs and received qualified payments reported on Form 1099-PATR from specified agricultural or horticultural cooperatives.
Even if you do not need to file Form 8995, it’s important to understand the pass-through deduction and the variables that influence whether and how much you save. Fortunately, there are many resources to help simplify the filing process and reduce the number of IRS worksheets you need to complete.
How to File Form 8995?
There are two forms to choose from, Form 8995 and Form 8995-A. The simplest version, Form 8995, has just one section (17 lines) and a relatively straightforward calculation of qualified business income (taking into account real estate investment trust (REIT) dividends and publicly traded partnership (PTP) income). Individuals may use this pared-down form if their total taxable income before the QBI deduction is below the threshold ($170,050 for single and head-of-household taxpayers; $220,050 for married filing jointly; or $340,100 for those filing as a trust or estate) and they aren’t a patron in a specified agricultural or horticultural cooperative.
A smaller group of individuals with higher incomes must use the more extensive Form 8995-A, which has four extremely detailed sections and schedules that help figure out the individual’s qualified business income deduction. This form also requires a detailed breakdown of income and losses for each qualified business entity that the taxpayer owns or controls.
How to Fill out Form 8995?
The form is comparatively simple, consisting of just one page with 17 lines. You can use the simplified version of the form if your total taxable income is at or below the threshold and you aren’t a horticultural or agricultural cooperatives patron.
You must include on line 1 the name and taxpayer identification number of up to five businesses you operate. On lines 2-5, enter your qualified business income or loss from each of these businesses. Add up the amount on line 2 to get your overall qualified business income for the year. If you have a net loss, you must carry it forward to future years.
For those with a positive net qualified business income, you will need to determine the code section 199A deduction on lines 16-17. This calculation takes into account apportioned loss netting, REIT dividends and PTP income (or losses), and capital gains.
