What is Form 8995? Guide to the QBI Deduction for Small Business

Feeling a bit lost in the tax jungle? Don't panic, especially if you've got Form 8995 staring at you like a mystery code. We're here to help small business owners like you understand this important paper and uncover the QBI deduction. It's like finding treasure hidden in your taxes! Our guide will make it super easy, guiding you through Form 8995 so you can save money on taxes and make the most of your business earnings. Ready to make tax season a breeze? Let's get started! 

What is Form 8995? 

Form 8995 is like a special tool from the IRS for folks who own businesses that aren't big corporations. If you have a small business like a sole proprietorship, partnership, LLC, or S corporation, this form is for you. It helps you grab something called the QBI deduction, which is a way to save money on your taxes. 

Now, here's the backstory: In 2017, there was a tax law change that gave a break to big companies, but the little guys, like sole proprietors and LLCs, didn't get much out of it. So, the QBI deduction came to the rescue to make things fairer. 

Imagine you're a sole proprietor, and your business made $150,000 in 2022. With the QBI deduction, you can cut your taxable income by 20%, which means your taxable business income is now $120,000. 

But how do you actually get this 20% deduction? That's where Form 8995 steps in. 

If you're self-employed or have a small business and use Form 1040 for your taxes, you can claim the QBI deduction. To make it happen, you need to fill out either Form 8995 or the fancier version, Form 8995-A. 

Here's the breakdown

Form 8995: Taxpayers typically only need to complete the straightforward one-page document, Form 8995, when claiming the QBI deduction. 

Form 8995-A: If you're a higher-income individual, you might need to use Form 8995-A. It's a bit more detailed and has extra sections and schedules. It helps you figure out your deduction in a more complex situation. 

Whether you're a small business owner, a self-employed superhero, or navigating small business taxes, Form 8995 is your sidekick. It ensures you maximize your QBI deduction, keeping more money in your pocket come tax time! 

Who can use Form 8995 

1. Pass-through business owners 

• This form is specifically designed for owners of pass-through businesses, which are businesses that don't pay taxes themselves. Instead, the profits or losses "pass through" to the owner's individual tax return. 
• Common types of pass-through businesses include: 

• Sole proprietorships 
• Partnerships 
• Limited liability companies (LLCs) 
• S corporations 

2. Eligible income types 

• To qualify for the QBI deduction using Form 8995, your income must generally come from a qualified trade or business. This typically includes: 

• Income from providing services or goods to customers 
• Income from renting out property 
• Income from farming or fishing activities 

3. Income thresholds

• For tax year 2024: 

• Single filers or those married filing separately can use Form 8995 if their taxable income before the QBI deduction is under $182,100. 
• Married couples filing jointly can use Form 8995 if their taxable income before the QBI deduction is under $364,200. 

• Important note: These thresholds are subject to change annually, so it's always best to check the latest IRS guidance. 

4. Exclusions 

• Certain types of businesses and income are not eligible for the QBI deduction and, therefore, cannot use Form 8995. These include: 

• Specified service trades or businesses (SSTBs), such as doctors, lawyers, accountants, and consultants 
• Employees receiving wages 
• Income from C corporations 
• Income from certain investment activities 

5. Not a patron of specified cooperatives

• If you're a patron in a specified agricultural or horticultural cooperative, you'll need to use a different form to claim the deduction. 

Key Reminder 

• If your taxable income exceeds the threshold, you'll need to use the more complex Form 8995-A to calculate your QBI deduction.

Tip 

• If you're a small business owner or self-employed individual with eligible income from a pass-through business and meet the income thresholds, Form 8995 can be your key to unlocking valuable tax savings through the QBI deduction. 

Here are some key cautions to keep in mind when calculating Form 8995: 

1. Accurately determine qualified business income (QBI) 

• Not all business income qualifies: Exclude income from specified service trades or businesses (SSTBs), passive activities, and certain investment activities. 
• Consider business structure: QBI calculations can vary depending on whether you're a sole proprietor, partner, or S corporation shareholder. 
• Factor in losses and deductions: Some losses or deductions might need to be considered in subsequent years, affecting future QBI calculations. 

2. Properly apply income thresholds

• Confirm current thresholds: Double-check the IRS guidelines for the most up-to-date income thresholds, as they can change annually. 
• Calculate taxable income accurately: Ensure you're using the correct taxable income figure before applying the QBI deduction. 

3. Choose the right form 

• Understand form selection: Use Form 8995-A if your taxable income exceeds the threshold or if you have income from SSTBs, qualified REIT dividends, or qualified PTP income. 

4. Report income and expenses correctly: 

• Ensure accurate reporting: Ensure income and expenses are accurately reported on Schedule C or other business tax forms before completing Form 8995. 

5. Account for multiple businesses 

• Handle Each Separately: If you have multiple businesses, calculate QBI separately for each and then combine the amounts on Form 8995. 

6. Address losses

• Carryforward losses: If you have a qualified business net loss, it generally cannot be used to generate a QBI deduction in the current year. However, it can be carried forward to future years. 

7. Seek professional guidance

• Consult a tax professional: If you're uncertain about any aspect of Form 8995 or the QBI deduction, it's highly recommended to consult a qualified tax professional to ensure accuracy and maximize your tax benefits. 

Easy steps to claim pass-through deductions with Form 8995 

Feeling daunted by Form 8995 and the elusive QBI deduction? Fear not intrepid entrepreneur! We're about to embark on a guided tour, unlocking the secrets of this seemingly intimidating document and empowering you to claim your rightful tax savings. So, grab your calculator, buckle up, and get ready to navigate the labyrinthine lines with confidence. 

Step 1: Setting the stage (Lines 1-4) 

First things first, let's introduce your business crew! On lines 1-4, you'll spotlight your star players: up to five businesses, their names, and their individual qualified business income (QBI) or loss for the year. Think of it as a red-carpet entrance for your financial performers. Then, in line 2, add up the applause (or boos, depending on the loss) from each business - this becomes your total QBI score. Feeling a bit deflated by past losses? Worry not, Line 3 is your redemption arc - carry forward any net business loss from the previous year, ready to be redeemed in future victories. Finally, in line 4, combine the current year's QBI/loss total with the carried-over loss, like combining superpowers for the ultimate entrepreneurial team. 

Step 2: Diversifying your portfolio (Lines 6-10) 

But wait, there's more! Your financial empire extends beyond your core business. Lines 6-10 let you showcase your investments in real estate investment trusts (REITs) and publicly traded partnerships (PTPs). List your current year's income from these passive players, then, like a seasoned investor, add anything carried over from the previous year. Multiply this diversified income by 0.2, and voila! You've unlocked your 20% magic number for these investments. 

Step 3: Navigating the threshold (Lines 11-15) 

Remember the income threshold we mentioned? It's like a gatekeeper to your maximum QBI deduction. If your 2022 total taxable business income before the deduction is under $170,050 ($340,100 for joint filers), you unlock the full potential of your 20% deduction. Lines 11-12 are your passport checkpoints. Enter your taxable business income and net capital gains (think of it as subtracting your side hustle earnings) from your Form 1040. Now, the real test: in line 13, subtract your net capital gains from your qualified business income, like separating the wheat from the chaff. Multiply this refined income by 0.2, and boom! You have your 20% potential deduction on line 14. But, remember the gatekeeper? Compare your line 10 and line 14 numbers. Whichever is smaller becomes your true QBI deduction in line 15 - like choosing the best path after reaching a fork in the road. 

Step 4: Preparing for the Future (Lines 16-17) 

Life isn't always sunshine and rainbows, and sometimes your business might encounter a rough patch. That's where lines 16-17 come in. If your net qualified business income takes a nosedive and becomes negative, that's known as a qualified business loss. Don't fret! While you can't deduct it immediately, you can carry it forward, like a hidden weapon, to offset future success and claim your due deduction in a profitable year. 

You should fill Form 8995 if you

• Own a pass-through business and receive qualified business income. 
• Have taxable income within the eligibility thresholds for the simplified form. 
• Meet the qualifications for claiming the QBI deduction (see IRS guidelines for details). 

How to fill it

• Download the appropriate form from the IRS website or obtain it from an accountant or tax preparer. 
• Gather all necessary documents, such as business income and expense statements. 
• Carefully follow the instructions on the form and consult relevant IRS guidance if needed. 
• If using the simplified form, enter your income and calculate the deduction directly. 
• If using the expanded form, complete the additional schedules for detailed calculations. 
• Attach the completed form to your tax return when filing. 

Problems if you don't fill it

Missing out on the QBI deduction can result in: 

• Higher tax liability: You'll pay taxes on the full amount of qualified business income instead of enjoying the deduction. 
• Potential penalties and interest: If the missed deduction leads to underpayment of taxes, you may face penalties and interest charges. 
• Missed opportunity for tax savings: Claiming the QBI deduction can significantly reduce your tax burden, so not filling out the form leaves money on the table. 

How BookkeeperLive can help you 

This guide has demystified the process, making it easier for entrepreneurs to navigate their way through the complexities of tax season and maximize their benefits. 

Discover the convenience of simplifying your accounting and tax preparation with BookkeeperLive. Our comprehensive services are designed to support small businesses every step of the way. Sign up for a free trial today to experience the efficiency and accuracy of our services. Let BookkeeperLive be your trusted partner in ensuring your financial success, allowing you to focus on what you do best – growing your business. 

FAQs 

1. Where do I submit Form 8995? 

Attach Form 8995 to your Form 1040 individual tax return. 

2. Can I claim the QBI deduction if I have multiple businesses? 

Yes, calculate your QBI for each business separately and then combine the amounts on Form 8995. 

3. What's the difference between Form 8995 and Form 8995-A? 

Use the simpler Form 8995 if your taxable income before the deduction is below the threshold. Use Form 8995-A if your income exceeds the threshold or you have income from SSTBs, qualified REIT dividends, or qualified PTP income. 

4. Can I carry forward losses to future years? 

Yes, if your net qualified business income is negative, you can carry the loss forward to offset income in future tax years. 

5. What types of businesses aren't eligible for the QBI deduction? 

Specified service trades or businesses (SSTBs) like doctors, lawyers, and accountants, employees receiving wages, C corporations, and income from certain investment activities are not eligible. 

6. Who can use Form 8995 to claim the QBI deduction? 

You can use Form 8995 if you own a pass-through business (sole proprietorship, partnership, LLC, S corporation) with qualified business income and your taxable income before the deduction is below the threshold ($182,100 for single filers in 2024, $364,200 for joint filers).