When you receive a Schedule K-1 from a partnership or S corporation reporting income, the amounts reported are not automatically included in your Qualified Business Income (QBI) for purposes of calculating the Section 199A deduction. The IRS requires you to determine which items from the K-1 are actually includible in QBI based on how they are reported on your federal income tax return and whether they meet specific criteria under the Internal Revenue Code.
Key Rules for Determining QBI from Schedule K-1
- Not Automatically Included: The income, gain, deduction, or loss reported on your Schedule K-1 as “QBI/Qualified PTP Items Subject to Taxpayer-Specific Determinations” is not automatically included in your QBI. You must evaluate each item based on its treatment in computing your taxable income.
- Ordinary Business Income: Ordinary business income or loss is generally includible in QBI if it was used in computing your taxable income and was not excluded, suspended, or disallowed under any other section of the Code.
- Section 1231 Gains/Losses: A Section 1231 gain or loss is only includible in QBI if it is not treated as a capital gain or loss.
- Exclusions from QBI: QBI does not include wage income (except statutory employees), guaranteed payments, reasonable compensation from an S corporation, capital gains/losses, dividends, interest not allocable to a trade or business, commodities/foreign currency gains/losses, annuities (unless related to the trade or business), qualified REIT dividends, or qualified PTP income.
- Suspended Losses/Deductions: Losses or deductions suspended under other Code sections (e.g., §163(j), §469, §704(d)) are not qualified and are not included in QBI in the year they are suspended. They may be included in QBI only when allowed in computing taxable income, and only the portion attributable to QBI is considered.
How to Report QBI from K-1
- Use Form 8995 if your 2025 taxable income before the QBI deduction is ≤ $197,300 (single) or ≤ $394,600 (married filing jointly), and you are not a patron in a specified agricultural cooperative.
- Use Form 8995-A if your taxable income exceeds those thresholds or if you are a patron in a specified agricultural cooperative.
- Refer to the QBI Flow Chart (available in Form 8995 or 8995-A instructions) to determine whether each item from the K-1 qualifies as QBI.
Source:
Form 8995
Form 8995-A
Schedule K-1 (Form 1065)
Schedule K-1 (Form 1120-S)
Disclaimer: Always verify details with the current year’s Federal or State Department of Revenue Forms and Instructions. For complex situations, consult a CPA or tax attorney.