If you’re a small business owner eager to save on taxes with Form 8995, you’re in the right place. In this guide, we’ll cover everything you need to know about Form 8995—including its purpose, who is eligible, and how it differs from the similar but more complex Form 8995-A.
What is Form 8995?
Form 8995 is the IRS tax form that owners of pass-through entities—sole proprietorships, partnerships, LLCs, or S corporations—use to take the qualified business income (QBI) deduction, also known as the pass-through or Section 199A deduction.
The QBI deduction originated following the 14% corporate tax rate reduction that took place as part of the Tax Cuts and Jobs Act (TCJA) in 2017. Unfortunately, this tax cut only provided savings for companies registered as C-corporations, which make up only 5% of small businesses. Other small businesses, such as sole proprietorships and LLCs, saw no benefits from the TCJA. In response to this absence of tax savings for businesses other than C-corporations, legislators developed QBID.
Now, if you own a pass-through business that earned $150,000 in qualified business income as a sole proprietor during 2022, and the QBI deduction allows you to reduce your taxable income by 20%, your taxable business income for that year is $120,000.
So how do you claim your 20% tax deduction? That’s where Form 8995 comes into play.
If you are self-employed or own a small business and file Form 1040 (Individual Income Tax Return), you can claim the QBI deduction. To calculate and honor this deduction, you must complete Form 8995 or Form 8995-A.
- Form 8995: Most taxpayers who claim the QBI deduction only need to fill out Form 8995, a relatively simple, one-page document.
- Form 8995-A: A smaller group of higher-income individuals must complete Form 8995-A—the expanded, more complex version of Form 8995. In addition to the information required for Form 8995, those who use this form must complete four very detailed sections and schedules designed to help you figure out your deduction.
Who can use Form 8995?
To be eligible for QBI deduction, you must meet a few qualifications. For the most part, these criteria focus on business structure and income.
Business structure qualifications
Individuals must own at least one of the following pass-through business structures to qualify for the QBI deduction:
- Sole proprietorships
- Limited liability companies (LLCs)
- S corporations
- Estates and trusts
- Agricultural or horticultural cooperative (must use Form 8995-A)
Income type qualifications
Only certain types of income are accepted on Form 8995. These include taxable income from:
- Pass-through business income
- Qualified REIT dividends (REIT stands for real estate investment trust)
- Qualified PTP income or loss (PTP stands for publicly traded partnership)
- Rental real estate
Owners of pass-through business entities must meet the income threshold if they want to be eligible for the QBI deduction.
For 2022—the year you’re currently filing taxes for—the QBID eligibility income threshold is $340,100 for married couples who file jointly or $170,050 for all other filing statuses.
For 2023, the threshold increases to $364,200 for married couples filing jointly and $182,100 for married filing separately, singles, and heads of household who own a pass-through business.
If you meet the QBID business structure criteria and your taxable business income falls below the threshold set for your filing status, you likely qualify for the full deduction.
If your income exceeds the threshold, you are not automatically disqualified from taking the deduction; there are additional criteria the Internal Revenue Service sets to help determine whether the QBI deduction may qualify you for a partial deduction.
If your 2022 taxable income exceeds $440,100 for married filing jointly, or $220,050 for other filing statuses, then the deduction benefit phases out. If your 2023 taxable income exceeds $464,200 for married filing jointly, or $232,100 for other filing statuses, the deduction benefit phases out.
Fair warning: If you make more than the income threshold, and your job falls into specified service trades such as a lawyer, accountant, performer, or doctor, you will not qualify for the QBI deduction.
If your income exceeds the threshold and you aren’t in one of the professions excluded from the deduction, however, you may still be eligible. You will just need to use Form 8995-A.
Types of income that are excluded from the QBI deduction
Several types of income do not qualify for the pass-through deduction, so you should exclude these income forms from your deduction calculation. A few of these income sources include:
- Capital gains or losses or dividends
- Interest income unrelated to a business
- Wage income
- Annuities not related to your business
- Income not generated by a U.S.-run business
- Gains or losses in foreign markets
- Income, loss, or deductions from notional principal contracts
How to claim the pass-through deduction using Form 8995
You can use the same online tax services that most Americans use to assess your QBI eligibility and automatically calculate personal savings. If you choose this option, input your data carefully to prevent missing possible savings or having to redo your taxes because of mistakes.
Before you can start filling out Form 8995 and qualifying for the QBI deduction, you’ll report your business income and expenses on Schedule C, and your adjusted gross income on Form 1040. Note that you can take this deduction whether or not you itemize or take the standard deduction.
Regardless of the resources available to simplify the filing process—and reduce the number of IRS worksheets you have to fill out—having a basic grasp of the pass-through deduction and the factors that affect whether and how much you save is always a good idea. So let’s take a closer look at how you should fill out Form 8995 and calculate your pass-through deduction.
Line 1 of Form 8995 is where you’ll list the name of your business and its taxpayer identification number (up to five businesses: i, ii, iii, iv, v), and each business’s qualified income or loss incurred during that tax year. Then, in Line 2, record the total qualified business income or loss of the one to five businesses you listed in Line 1 (i to v).
If you’re carrying a net business loss from the year before, note this amount in Line 3.
Next, determine the answer for Line 4 by combining the numbers from Line 2 and 3 to determine the sum of your business’ carrying forward and income/loss total for the current year.
Finally, in Line 5, multiply your answer for Line 4 by .20 to get 20%.
Lines 6 through 10 address your income from real estate investment trusts (REIT) and publicly traded partnerships (PTP). Here, you’ll begin by listing your current year’s income from these types of investments. Then add their sum to anything you need to carryforward from the prior year, and multiply the total by 0.2 to give you the number you’ll list as 20%.
Lines 11 to 15 deal with the income threshold we discussed before. If your 2022 total taxable business income before the pass-through deduction is less than $170,050 ($340,100 for joint filers), your QBI deduction is the lesser of 20% of:
- Your taxable income minus net capital gains, or;
- Your qualified business income
On Lines 11-12, you need to enter your taxable business income and net capital gains (the sum of Line 3a and Line 7 on your Form 1040).
Then it’s time for the computation: Once you’ve determined your net capital gains, you subtract that amount from your qualified business income and write the result in Line 13. Next, multiply your result from Line 13 by 0.2 to get 20% and record the answer in Line 14. Finally, for Line 15, look at Line 10 and Line 14 and record the amount for whichever line displays the lesser value. This is your QBI deduction.
You use Lines 16 -17 to help calculate your carryover loss. When your net qualified business income is negative, we refer to this as a qualified business loss. While you cannot deduct it from your current year’s return, you can carry it forward to offset income in a future profitable year.
How Bench can help
If you’re overwhelmed by Form 8995, prefer an expert touch, or lack enough time to determine all the tax savings you know your small business deserves, Bench has your back.
As America’s largest professional bookkeeping service for small businesses, we can handle your bookkeeping and tax filing for you while you focus on running your business. When Bench handles your taxes, you don’t have to worry about filling out Form 8995 correctly or losing out on potential savings. It’s all included in your subscription. Learn how Bench works.
Does my side gig qualify for the pass-through deduction?
So if you earn $8,000 as an Uber or Lyft driver (after business expenses), you can deduct 20%, which is $1,600. When you subtract $1,600 from $8,000, you get $6,400. So $6,400 is your taxable business income with the pass-through deduction.
Keep in mind that the deduction only applies to business income. While you can deduct up to 20% of your side gig income from your taxable business income, that does not mean you get to deduct 20% from your overall taxable income. For example, the $60,000 in taxable income you earned from your W-2 employer will remain unaffected by the QBI deduction.
Things to keep in mind when filling out Form 8995
As a result of unverified and possibly erroneous deduction claims by individuals trying to take advantage of the system, the IRS is reassessing how it verifies the validity of QBI deductions in 2022. All that said, keep an eye out for more specific deduction restrictions in the coming year.
Don’t miss out on business savings from the QBI deduction
You don’t need to be a legal expert or numbers guru to save money with the pass-through deduction by completing Form 8995. If you find yourself struggling, a visit to Bench’s Tax Filing Resource Hub for Small Businesses will likely both answer your questions and ease your concerns.
Should you need additional help, consider a Bench subscription, which provides you with one-on-one tax prep and filing advice as well as affordable bookkeeping services and resources all year round—because who doesn’t love finding new ways to save?