Individuals, eligible estates, and trusts may take the Qualified Business Income (QBI) deduction if they meet specific criteria under Internal Revenue Code (IRC) Section 199A. The deduction is available to taxpayers who have qualified business income (QBI), qualified REIT dividends, or qualified publicly traded partnership (PTP) income or loss. The eligibility and computation method depend on the taxpayer’s taxable income level and filing status.
Eligible Taxpayers
- Individuals: Individuals with QBI, qualified REIT dividends, or qualified PTP income may claim the deduction.
- Estates and Trusts: Eligible estates and trusts may also claim the deduction. For grantor trusts or estates, the owner computes the deduction as if the items were received directly. For non-grantor trusts, the trust may either claim the deduction or provide information to beneficiaries based on the allocation of distributable net income (DNI). Section 199A items allocated to beneficiaries are not included in the trust’s deduction computation.
- Electing Small Business Trusts (ESBT): ESBTs must compute the QBI deduction separately for the S and non-S portions of the trust. The Form 8995 or Form 8995-A used for the S portion must be attached to the ESBT tax worksheet filed with Form 1041, with “ESBT” noted in the top margin.
Income Thresholds and Forms Used
- Form 8995 (Simplified Computation): Used if taxable income before the QBI deduction is ≤ $394,600 for married filing jointly or ≤ $197,300 for all other filing statuses, and the taxpayer is not a patron in a specified agricultural or horticultural cooperative.
- Form 8995-A (Detailed Computation): Used if taxable income exceeds these thresholds or if the taxpayer is a patron in a specified agricultural or horticultural cooperative.
Key Limitations
- Specified service trades or businesses (SSTBs) are not considered qualified trades or businesses for taxpayers with taxable income above the threshold (subject to phase-in rules).
- Corporations and employee services are never qualified trades or businesses for QBI deduction purposes.
- A qualified business net loss disqualifies a taxpayer from the QBI deduction unless they have qualified REIT dividends or qualified PTP income. The loss is carried forward to future years.
Source:
Form 8995
Form 8995-A
Disclaimer: Always verify details with current Federal or State Department of Revenue Forms and Instructions. For complex situations, consult a CPA or tax attorney.