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IRS Issues Draft Instructions for Qualified Business Income Deduction
(Parker Tax Publishing October 2019)
The IRS released draft instructions for Form 8995-A, Deduction for Qualified Business Income, following the release of the draft Form 8995-A at the end of July. It includes instructions for Schedule A, Specified Service Trades or Businesses; Schedule B, Aggregation of Business Operations; Schedule C, Loss Netting and Carryforward; and Schedule D, Special Rules for Patrons of Agricultural or Horticultural Cooperatives. Draft Instructions for Form 8995-A.
In July, the IRS released the following drafts of 2019 forms relating to the calculation of the Code Sec. 199A qualified business income (QBI) deduction, a new deduction that began in 2018 but for which there was no form: Draft Form 8995, Qualified Business Income Deduction Simplified Computation; Draft Form 8995-A, Qualified Business Income Deduction; and various schedules to accompany Form 8995-A.
Draft Form 8895-A, Schedule C, Loss Netting and Carryforward; and
Draft Form 8895-A, Schedule D, Special Rules for Patrons of Agricultural or Horticultural Cooperatives.
Subsequently, at the end of August, the IRS issued draft instructions for Form 8995 only. The IRS has now released the draft instructions for Form 8995-A which also incorporates the instructions for the various schedules that are filed with Form 8995-A. A portion of the draft Form 8995-A instructions mimic the draft instructions for Form 8995. The draft instructions also include the 17-step flowchart for calculating the QBI deduction that is included in the draft instructions for Form 8995.
Taxpayers Required to Use Form 8995-A
Individuals, estates, and trusts use Form 8995-A to calculate the QBI deduction if:
(1) they have QBI, qualified REIT dividends, or qualified PTP income or loss; and
(2) taxable income before the QBI deduction is more than $160,700 ($160,725 if married filing separately; $321,400 if married filing jointly); or
(3) the taxpayer is a patron in a specified agricultural or horticultural cooperative.
Otherwise, Form 8995, Qualified Business Income Deduction Simplified Computation, is used to calculate the QBI deduction.
Calculating the QBI Component
In determining QBI, the instructions note that the QBI component must first be calculated in determining if there is a QBI deduction to be reported on Form 8995-A. The QBI component is generally 20 percent of the taxpayer's QBI from the taxpayer's trades or businesses. However, if the taxpayer income before the QBI deduction exceeds the threshold ($160,725 if married filing separately; $321,400 if married filing jointly; $160,700 for all others) then the QBI for each of the taxpayer's trades or businesses may be partially or fully reduced to the greater of (1) 50 percent of W-2 wages paid by the qualified trade or business, or (2) 25 percent of the W-2 wages plus 2.5 percent of the unadjusted basis immediately after acquisition (UBIA) of qualified property from the qualified trade or business. The partial or full reduction to QBI is determined by the taxpayer's taxable income.
Schedule A (Form 8995-A) - Specified Service Trades or Businesses (SSTB)
Schedule A (Form 8995-A) is completed if the taxpayer's trade or business is a specialized service trade or business (SSTB) and the taxpayer's taxable income is more than $160,700 but below $210,700 ($160,725 and $210,725 if married filing separately; $321,400 and $421,400 if married filing jointly).
If the taxpayer's taxable income is $160,700 or less ($160,725 if married filing separately; $321,400 if married filing jointly), Schedule A (Form 8995-A) is not required.
If the taxpayer's taxable income is $210,700 or greater ($210,725 if married filing separately; $421,400 if married filing jointly), the taxpayer's SSTB doesn't qualify for the QBI deduction.
The instructions note that Schedule A (Form 8995-A), Part II, should be used for SSTBs that are publicly traded partnerships (PTPs), and Part I should be used for all other SSTBs.
Schedule B (Form 8995-A) - Aggregation of Business Operations
If the taxpayer qualifies and chooses to aggregate multiple trades or businesses into a single trade or business, then Schedule B must be completed before starting Part I, Trade, Business, and Aggregation Information, of Form 8995-A.
If any of the taxpayer's aggregations have a net loss for the current year or the taxpayer has a qualified business net loss carryforward from prior years, then Schedule C (Form 8995-A) - Loss Netting and Carryforward, is required to be completed before starting Part I. If none of the taxpayer's aggregations have a net loss in the current year and the taxpayer doesn't have a qualified business loss carryforward from prior years, then the aggregations are entered on the appropriate lines of Form 8995-A, Part II, Determine Your Adjusted Qualified Business Income.
Schedule C (Form 8995-A) - Loss Netting and Carryforward
If any of the taxpayer's trades, businesses, or aggregations have a net loss for the current year or the taxpayer has a qualified business net loss carryforward from prior years, then Schedule C (Form 8995-A) must be completed before starting Part I. This includes prior year loss carryforwards even if the loss was unreported or the trade or business that generated the loss is no longer in existence.
Schedule C (Form 8995-A) offsets a taxpayer's trade or business net losses against net income from the taxpayer's other trades or businesses. The net loss must be apportioned among all of the taxpayer's trades or businesses with net income in proportion to their net income.
Schedule D (Form 8995-A) - Special Rules for Patrons of Agricultural or Horticultural Cooperatives
Schedule D (Form 8995-A) must be completed if the taxpayer is a patron in a specified agricultural or horticultural cooperative and the taxpayer is claiming a QBI deduction in relation to the trade or business conducted with the cooperative. A specified agricultural or horticultural cooperative is a cooperative that markets or is engaged in the manufacturing, production, growth, or extraction of any agricultural or horticultural products to which Part I of Subchapter T applies.
For a discussion of how the QBI deduction is calculated, see Parker Tax ¶151,500.
Disclaimer: This publication does not, and is not intended to, provide legal, tax or accounting advice, and readers should consult their tax advisors concerning the application of tax laws to their particular situations. This analysis is not tax advice and is not intended or written to be used, and cannot be used, for purposes of avoiding tax penalties that may be imposed on any taxpayer. The information contained herein is general in nature and based on authorities that are subject to change. Parker Tax Publishing guarantees neither the accuracy nor completeness of any information and is not responsible for any errors or omissions, or for results obtained by others as a result of reliance upon such information. Parker Tax Publishing assumes no obligation to inform the reader of any changes in tax laws or other factors that could affect information contained herein.
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