Form 8995-A is essential for taxpayers looking to claim the Qualified Business Income (QBI) Deduction under section 199A of the Internal Revenue Code. This deduction allows eligible business owners to deduct up to 20% of their qualified business income, providing significant tax savings. Filing Form 8995 A correctly is crucial to maximise this benefit. This article will walk you through a detailed, step-by-step guide to completing Form 8995-A, ensuring you capture all the information needed to claim your QBI Deduction accurately.
Understanding the Purpose of Form 8995-A
Form 8995-A is used to calculate the QBI Deduction for taxpayers whose taxable income exceeds the threshold amounts set by the IRS. This form includes detailed worksheets and additional schedules to help determine the correct deduction. The form is more complex than its counterpart, Form 8995, which is used by those with taxable income below the threshold.
Who Needs to File Form 8995-A?
You need to file Form 8995-A if your taxable income is above the threshold amounts for your filing status:
- $170,050 for single or head of household filers
- $340,100 for married filing jointly or qualifying widow(er) filers
Additionally, if you are a business owner, partner in a partnership, shareholder in an S corporation, or a beneficiary of a trust or estate, and your income exceeds these amounts, you will likely need to use this form.
Gathering Required Information
Before starting, gather the following information:
- Your total taxable income
- Qualified business income (QBI) from each trade or business
- W-2 wages paid by your business
- The unadjusted basis immediately after acquisition (UBIA) of qualified property
- Income from publicly traded partnerships (PTPs) and real estate investment trusts (REITs)
Having these details handy will make the process smoother and help ensure accuracy.
Completing Part I: Trade or Business Information
Part I of Form 8995-A requires you to list each trade or business that generates QBI. For each business, you must provide:
- The name and EIN (if applicable)
- The type of entity (sole proprietorship, partnership, S corporation, etc.)
- The net QBI amount for each business
Ensure all figures are accurate as errors here can impact the entire calculation.
Completing Part II: Determining Your QBI Deduction
In Part II, you calculate the QBI Deduction itself. This involves:
- Summing the QBI from all qualified trades or businesses
- Applying any carryovers or losses from prior years
- Subtracting any adjustments for business income from PTPs and REITs
Use the worksheets provided in the Form 8995-A instructions to help with these calculations.
Completing Part III: Special Rules for Certain Specified Service Trades or Businesses (SSTBs)
If you operate an SSTB, such as a health, law, or financial services firm, special rules apply. The deduction may be limited based on your taxable income. In Part III, you must determine the phase-in range for SSTB limitations, which affects the QBI Deduction amount.
Completing Part IV: Calculating the W-2 Wages and UBIA of Qualified Property Limitations
Part IV focuses on determining if your QBI Deduction is subject to W-2 wages and UBIA limitations. If your taxable income exceeds the threshold, your deduction may be limited to the lesser of:
- 20% of QBI
- The greater of (a) 50% of W-2 wages or (b) 25% of W-2 wages plus 2.5% of the UBIA of qualified property
This part requires precise calculations and understanding of your business’s wage payments and property investments.
Reviewing the Final QBI Deduction Amount
After completing Parts I-IV, review the final QBI Deduction amount. This is calculated by summing the allowable deductions from each business and applying any necessary limitations. Ensure all figures are consistent and check for any errors that might affect the final deduction.
Completing and Attaching the Form to Your Tax Return
Once Form 8995 A is complete, attach it to your tax return (Form 1040, 1040-SR, or 1040-NR). Ensure that all accompanying schedules and worksheets are included, as missing documents can lead to processing delays or IRS inquiries.
Common Mistakes to Avoid
To ensure your Form 8995 A is accurate, avoid these common mistakes:
- Incorrectly calculating QBI or failing to include all business activities
- Misreporting W-2 wages or UBIA
- Neglecting to apply phase-in limitations for SSTBs
- Omitting necessary carryovers or adjustments
Double-check all entries and use the IRS instructions as a reference to minimize errors.
Conclusion
Filing Form 8995-A can be complex, but understanding each part and following a systematic approach can make the process manageable. Accurately completing this form ensures you maximize your QBI Deduction and comply with IRS regulations. If you find the process overwhelming, consider consulting a tax professional for assistance.
FAQs
1. What is the difference between Form 8995 and Form 8995-A?
Form 8995 is used by taxpayers with taxable income below the threshold amounts, while Form 8995-A is for those above the thresholds and requires more detailed calculations.
2. Can I claim the QBI Deduction if I have a negative QBI?
No, if your QBI is negative, you cannot claim the deduction for that year. The negative amount will carry over to the next year.
3. Do I need to file Form 8995 A if I have multiple businesses?
Yes, if your taxable income exceeds the thresholds, you must use Form 8995 A to calculate the QBI Deduction for each qualified business.
4. Are rental properties eligible for the QBI Deduction?
Rental properties can qualify if they meet certain criteria, such as being a trade or business under IRS regulations and providing necessary services to tenants.
5. How do I handle QBI from a partnership or S corporation?
You should receive a Schedule K-1 from the partnership or S corporation detailing your share of QBI, W-2 wages, and UBIA, which you will need to report on Form 8995 A.
Also read: CPA DATA SOLUTIONS: HOW TO CHOOSE THE RIGHT SOFTWARE FOR YOUR FIRM