As a tax professional, I often come across people who don’t know all sorts of tax forms, especially IRS form 8995. This is pretty important to keep your money safe and avoid penalties. In this article, I will explain that this is an IRS form 8995, what lines you need to fill out, and the features of this form.
What is IRS Form 8995?
Form 8995, also known as Qualified Business Income Deduction Simplified Computation, is the tax form that taxpayers use to claim a Qualified Business Income (QBI) deduction according to Section 199A of the Internal Revenue Code. This deduction allows eligible taxpayers to deduct up to 20% of their qualifying business income from their taxable income.
Qualified business earnings are generally categorized as earnings acquired by a personal business, partnership, limited liability company (LLC), S company, or trust that is engaged in a skilled trade or business in the United States. However, there are specific limits and limitations regarding who has the opportunity to claim this deduction and how much they have every chance of deducting.
The purpose of Form 8995 is to help taxpayers calculate the QBI deduction easily. There is another version of this form, Form 8995-A, which is used for taxpayers in more difficult circumstances.
Lines for filling out IRS Form 8995
Form 8995 has several lines that need to be filled out to calculate the QBI deduction. Here is a breakdown of the lines and what information is required:
Line 1:
Qualified Business Income (QBI) On line 1, taxpayers must enter their qualified business income. This is the net amount of income, gain, deduction, and loss from a qualified trade or business that is conducted in the United States. Taxpayers can find this information on Schedule C (Form 1040), Schedule E (Form 1040), or Schedule F (Form 1040).
Line 2:
REIT Dividends and PTP Income On line 2, taxpayers must enter any qualified real estate investment trust (REIT) dividends and publicly traded partnership (PTP) income. These are separate from the qualified business income reported on line 1.
Line 3:
Taxable Income On line 3, taxpayers must enter their taxable income, which is their total income minus any deductions and exemptions.
Line 4:
Threshold Amount On line 4, taxpayers must enter the threshold amount for the year. This amount is adjusted annually for inflation and is used to determine if a taxpayer’s deduction is limited.
Line 5:
Tentative QBI Deduction On line 5, taxpayers calculate their tentative QBI deduction by multiplying their qualified business income on line 1 by the QBI percentage. The QBI percentage is the lesser of 20% of the taxpayer’s taxable income minus any net capital gain.
Line 6:
REIT and PTP Deduction On line 6, taxpayers calculate their deduction for qualified REIT dividends and PTP income by multiplying the amount on line 2 by 20%.
Line 7:
Combined QBI and REIT/PTP Deduction On line 7, taxpayers add the amounts from lines 5 and 6 to determine their total combined QBI and REIT/PTP deduction.
Line 8:
Overall Limitation On line 8, taxpayers must compare their combined QBI and REIT/PTP deduction from line 7 to either 20% of their taxable income minus any net capital gain, or the greater of 50% of their W-2 wages or 25% of their W-2 wages plus 2.5% of the unadjusted basis immediately after acquisition (UBIA) of qualified property. Taxpayers must enter the smaller of the two amounts on line 8.
Line 9:
QBI Loss Carryforward If a taxpayer’s QBI deduction is limited in the current year, they may be able to carry forward any unused portion to future years. On line 9, taxpayers can calculate their QBI loss carryforward amount.
Line 10:
QBI Loss Carryforward Included in Taxable Income If a taxpayer has a QBI loss carryforward amount on line 9, they may need to include a portion of it in their taxable income for the current year. The amount to include is calculated on line 10.
Line 11:
QBI Loss Carryforward Included in Combined QBI and REIT/PTP Deduction Similar to line 10, if a taxpayer has a QBI loss carryforward amount on line 9, they may need to include a portion of it in their combined QBI and REIT/PTP deduction. The amount to include is calculated on line 11.
Line 12:
Final QBI Deduction On line 12, taxpayers enter their final QBI deduction amount, which is the smaller of their combined QBI and REIT/PTP deduction from line 7 or their overall limitation from line 8.
Features of IRS Form 8995
Here are some key features of Form 8995:
Simplified computation:
As the name suggests, this form provides a simplified way to calculate the QBI deduction for eligible taxpayers. The IRS designed this form to make it easier for taxpayers to claim the deduction without having to do complex calculations.
Two versions available:
Form 8995 has two versions – the simplified version (Form 8995) and the more complex version (Form 8995-A). The simplified version is for taxpayers who have straightforward businesses and relatively simple tax situations, while the more complex version is for taxpayers who have more complicated businesses or tax situations.
Limited to certain businesses:
The QBI deduction is limited to certain types of businesses. Only those engaged in a qualified trade or business within the United States are eligible to claim the deduction. Businesses that generate passive income or investment income are generally not eligible.
Income limitations:
There are income limitations for the QBI deduction. Taxpayers whose taxable income exceeds a certain threshold may have their deduction limited or phased out entirely.
Complex calculations:
While Form 8995 provides a simplified way to calculate the QBI deduction, there are still several calculations involved. Taxpayers must carefully follow the instructions and fill out each line accurately to ensure they are claiming the correct amount of the deduction.
Need for accurate record keeping:
To claim the QBI deduction, taxpayers must keep accurate records of their business income, expenses, and deductions. This can include keeping track of receipts, invoices, and other financial documents.
Let’s summarize
Form 8995 is an important tax form for taxpayers eligible to claim a QBI deduction. This deduction can provide significant tax benefits for those who qualify, but it is important to follow the instructions carefully and complete each line of the form accurately. Taxpayers with more complex situations may need to use the more detailed Form 8995-A. As always, it is a good idea to consult with a tax professional if you have any questions or concerns about your taxes or tax forms.
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