The deduction for qualified business income (QBI), also known as the Section 199A deduction, is computed using Form 8995 or Form 8995-A, depending on the taxpayer’s income level and business type. The deduction allows eligible individuals, trusts, and estates to deduct up to 20% of their net QBI from a qualified trade or business, including income from pass-through entities (such as partnerships, S corporations, and sole proprietorships), plus 20% of qualified REIT dividends and qualified publicly traded partnership (PTP) income. However, the total deduction is limited to 20% of taxable income (before the QBI deduction) minus net capital gain (increased by any qualified dividends).
Eligibility and Form Selection
- Use Form 8995 if your taxable income before the QBI deduction is at or below $197,300 ($394,600 if married filing jointly) and you are not a patron of an agricultural or horticultural cooperative.
- Use Form 8995-A if your income exceeds these thresholds or if you are a patron of such a cooperative.
Computing the QBI Deduction
The QBI deduction is calculated in two main parts:
1. QBI Component
- QBI includes net income, gain, deduction, or loss from trades or businesses effectively connected with the U.S., such as income from partnerships (excluding PTPs), S corporations, sole proprietorships, and certain trusts.
- It includes items like unreimbursed partnership expenses, business interest expense, deductible part of self-employment tax, self-employment health insurance, and retirement plan contributions.
- QBI does NOT include wage income (except statutory employees), S corporation reasonable compensation, guaranteed payments, capital gains/losses, dividends, interest not allocable to a trade or business, commodities/foreign currency gains/losses, annuities (unless business-related), qualified REIT dividends, or qualified PTP income.
- Losses suspended under other tax code provisions (e.g., sections 163(j), 179, 469) are not included in QBI for the year they are suspended but may be included later when allowed.
2. REIT and PTP Component
- Includes 20% of qualified REIT dividends and qualified PTP income.
- PTP income from a specified service trade or business (SSTB) may be limited or excluded if taxable income exceeds thresholds.
Deduction Limitations
- The total QBI deduction is limited to the lesser of:
- The sum of the QBI component and REIT/PTP component.
- 20% of taxable income (before the QBI deduction) minus net capital gain (plus qualified dividends).
- For higher-income taxpayers (above thresholds), additional limitations apply based on W-2 wages paid and Unadjusted Basis Immediately After Acquisition (UBIA) of qualified property.
Reporting on Tax Return
The computed QBI deduction is reported on Line 13a of Form 1040 or Form 1040-SR. The completed Form 8995 or Form 8995-A must be attached to the return.
Source:
Disclaimer: Always verify details with the current year’s IRS Forms and Instructions or consult a tax professional for personalized advice. The information provided is based on IRS guidance for the 2025 tax year.