If you are a business owner and looking for a qualified business income deduction, then you may be guessing which form to fill out. The answer is tax form 8995. It is a new form and its sole purpose is to claim pass-through deductions on your eligible company income. It may sound complicated but it is not. Bookify is going to guide you on how to fill out the IRS form 8995, important instructions, and eligibility criteria.
In addition, there is also IRS form 8995-A. We will also explain how both forms are different.
What is Form 8995?
In 2017, the Tax Cuts and Jobs Act reduced the corporate tax rate from 35% to 14%. This led to the creation of the QBI deduction. As part of the 2017 TCJA, the Section 199A deduction was implemented. Subject to certain criteria and restrictions, Section 199A provides taxpayers who are not corporations with a deduction equal to 20% of qualified business income (QBI) derived from a qualified trade or business.
Therefore, to gain the benefit of deduction the IRS releases form 8995.
Form 8995 is simple. It is a one-page form and has 17 lines. If your total taxable income before the eligible business income deduction is equal to or less than the threshold and you do not support an agricultural or horticultural cooperative, you may utilize this form.
Who Can Fill the Form 8995?
There are basically two criteria to be eligible for filing form 8995. It can be a business structure or income criteria.
The person should own at least one of the following pass-through businesses.
● Sole-proprietorship
● S corporations
● Partnerships
● Limited liability companies (LLCs)
● Estates and trusts
However, an agricultural or horticultural cooperative must use Form 8995-A.
On the other hand, the following taxable income is eligible for claiming the deduction on the form.
● Qualified real estate investment trust (REIT) dividends.
● Qualified publicly traded partnership (PTP) income or loss.
● Rental real estate.
● Pass-through business income.
Income Threshold for 2023
In 2023, the top threshold is $364,200 for married couples filing jointly and $182,100 for singles, heads of households with pass-through enterprises, and married couples filing separately.
For 2022, it was $170,050 for the single filer and $340,100 for joint filers.
If your taxable income in 2022 exceeds $440,100 for married couples filing jointly or $220,050 for other filing statuses, the deduction benefit fades out. If your taxable income in 2023 exceeds $464,200 for married couples filing jointly or $232,100 for other filing statuses, the deduction benefit fades out.
IRS Tax Form 8995 Instructions
Below is a list of the details that should be on Form 8995.
Lines 1-4: Mention Qualified Business Income
You can mention up to five businesses on Line 1 of the form. You should also enter the Taxpayer Identification Numbers and Qualified Business Income for each business. Lines 2 to 5 should be used to input the entire qualifying business income as well as any qualified business losses carried over from the prior tax year. The total should then be multiplied by 20%.
Lines 6-10: REIT Income
Lines 6 to 10 include any dividends or income you get from a publicly traded partnership (PTP) or real estate investment trust (REIT). In the following lines, you should enter your total investment income for the current year. Moreover, you should also include any carryovers from the prior year. Then, multiply the sum by 0.2 to calculate the 20% deduction.
Lines 11-15: Taxable Income
The following are your options for your pass-through deduction if your taxable income before deducting your eligible business income is less than the aforementioned pass-through income figures:
● Your taxable income following your net capital gains deduction.
● Your qualifying business income.
Depending on which of these two amounts is lesser, that will be your pass-through income.
You must disclose your taxable income and net capital gains on lines 11–14. To calculate 20%, subtract your net capital gains from your eligible business income and then multiply the result by 0.2.
Lines 16-17: Loss Carryforwards
You have a qualified business loss if your net qualified business income is negative. So, you will not be able to claim a deduction. However, you will be able to carry over the loss to the next year. You can mention the loss carryforwards in lines 16-17.
Form 8995 vs. Form 8995-A
Form 8995-A has four parts and four more schedules than Form 8995. It is a more detailed version. The qualified business income deductions, potential phaseouts of the deduction, and resulting deduction are all calculated using this form.
As we know, taxpayers who meet the following criteria are eligible to fill out 8995:
● Have qualified business income.
● Qualified REIT dividends.
● Qualified PTP income
● Have taxable income below the threshold amount.
If your income exceeds the acceptable income threshold or if you are a member of an agricultural or horticultural cooperative, you must use Form 8995-A.
However, you must finish Form 1040 Schedule A, B, or C, depending on your particular business circumstances, before starting Form 8995-A.
Related Posts
- Gross Profit vs. Net Income
- Revenue vs. Profit:
- Eligibility for the Qualified Business Income Deduction
Frequently Asked Questions
How do I know if I qualify for filling out form 8995?
In 2022 if your total taxable income, which includes your business income as well as other sources of income, is at or less $170,050 for single filers and $340,100 for joint filers, then you are eligible for filling out form 8995.
Why do I need form 8995?
This Form allows pass-through business owners the ability to write off up to 20% of their eligible business income. So, if you qualify for a deduction then you should use the form to claim it.
Who can fill out the tax forms 8995 and 8995-A?
The individuals who own any of the following pass-through businesses can use the form:
● Sole proprietorship
● Partnership
● Limited liability company (LLC)
● S corporations
What should I enter on form 8995?
On Form 8995, only a few types of income are permitted. They comprise taxable earnings from a business’s pass-through revenue. qualified dividends on REITs and PTPs.
