Form 8995 QBI Deduction for Small Business Owners

Running a small business comes with many responsibilities, including keeping track of your finances and filing taxes correctly. One important tax benefit that small business owners should know about is the Qualified Business Income (QBI) deduction. This deduction can help lower your taxable income, which means you pay less in taxes. To claim this benefit, you may need to fill out Form 8995.

This guide will explain what Form 8995 is, who can use it, how to fill it out, and why it matters for small business owners. We will keep things simple and easy to understand, so you can make the most of this valuable tax deduction.

What is the QBI Deduction?

The Qualified Business Income (QBI) deduction was introduced in 2018 as part of the Tax Cuts and Jobs Act (TCJA). It allows eligible businesses to deduct up to 20% of their qualified business income. This deduction is available to business owners who operate as sole proprietors, partnerships, S corporations, or other pass-through entities.
Pass-through businesses do not pay taxes as corporations do. Instead, the business’s income "passes through" to the owner’s personal tax return, and the owner pays taxes on it. The QBI deduction helps reduce the amount of income that is taxed.
Not all business income qualifies for the deduction. Certain types of businesses, especially those offering personal services like doctors, lawyers, and consultants, may have limits on their QBI deductions if their income is too high.

What is Form 8995?

Form 8995 is a tax form that helps eligible taxpayers calculate and claim their QBI deduction. The form provides a simplified way to determine how much of their business income they can deduct from their taxable income.

The IRS has two versions of the form:

• Form 8995 – A simplified version for business owners who meet the income requirements.
• Form 8995-A – A more detailed version for those with more complex tax situations.

Most small business owners with taxable income below a certain threshold can use Form 8995 to quickly calculate their deductions.

Who Can Use Form 8995?

To qualify for using Form 8995, you must meet the following conditions:

1. You own a pass-through business. This includes sole proprietorships, partnerships, S corporations, or other pass-through entities.
2. Your taxable income is below the IRS threshold. For 2023, this threshold is $182,100 for single filers and $364,200 for married couples filing jointly. If your income is below this amount, you can use the simplified Form 8995.
3. Your business earns qualified business income (QBI). QBI includes profits from your business but does not include wages you pay to employees, dividends, or capital gains.

If you exceed the income limits or have a more complex tax situation, you must use Form 8995-A instead.

Parts of Form 8995

Form 8995 is broken into several sections that help calculate your QBI deduction. Here’s what each part includes:

Part I: Trade or Business Information

In this section, you list your business name, Employer Identification Number (EIN) (if applicable), and report the amount of qualified business income you earned from each business.

Part II: Calculation of QBI

Here, you calculate your total qualified business income by adding up earnings from all eligible businesses and applying any necessary adjustments.

Part III: Determining the Deduction

This part calculates your QBI deduction. If your taxable income is below the threshold, you simply multiply your total QBI by 20% to determine the deduction amount.

Part IV: Final Deduction Amount

Finally, you determine your final deduction amount and transfer it to your Form 1040 (Individual Tax Return).

How to Fill Out Form 8995

Filling out Form 8995 is straightforward if you follow these steps:

1. Enter your business information – Provide details about your business, including its name and Employer Identification Number (EIN) if you have one.
2. List your qualified business income (QBI) – Report the amount of money your business made that qualifies for the deduction.
3. Multiply QBI by 20% – If you meet the income requirements, simply multiply your QBI by 20% to calculate your deduction.
4. Check taxable income limits – Make sure your total taxable income is within the limits to use Form 8995.
5. Transfer the deduction – Once you calculate your deduction, enter it on your Form 1040 tax return.

Why is Form 8995 Important for Small Business Owners?

Using Form 8995 can help lower your taxable income, which means you may pay less in taxes. This deduction allows small business owners to keep more of their hard-earned money and reinvest in their businesses.

Here are some key benefits of using Form 8995:

• Reduces taxable income – The QBI deduction lowers the amount of business income that is taxed.
• Simplifies tax filing – Form 8995 is designed to be easy to complete for those who qualify.
• Encourages business growth – With lower taxes, you can reinvest in your business by hiring employees, purchasing equipment, or expanding operations.

Common Mistakes to Avoid When Filing Form 8995

To ensure you get the full benefit of the QBI deduction, avoid these common mistakes:

• Misreporting income – Double-check that you are including only qualified business income.
• Not meeting income limits – If your taxable income is above the IRS threshold, you may need to use Form 8995-A instead.
• Incorrect calculations – Make sure you correctly multiply your QBI by 20% and follow all required steps.
• Failing to file Form 8995 – Some business owners forget to include this form with their tax returns, missing out on potential tax savings.

If you’re unsure about any part of the form, consider consulting a tax professional to help ensure accuracy.

Additional Tips for Maximizing Your QBI Deduction

Keep accurate records – Maintain detailed records of your business income and expenses to avoid errors.
Understand phase-out limits – If your income is close to the IRS threshold, consult a tax advisor to see how you can still benefit.
Review IRS updates – Tax laws change, so check IRS guidelines yearly to stay compliant.
Consider retirement contributions – Making tax-deductible contributions to retirement accounts can help keep your taxable income below the threshold.

Unlock the Full Potential of Your Tax Savings with Global FPO

Navigating tax deductions can be overwhelming, but you don’t have to do it alone. Global FPO provides expert tax consulting services designed to help small business owners maximize their savings while staying compliant with IRS regulations. Whether you need assistance with Form 8995, tax planning, or bookkeeping, Global FPO can guide you every step of the way.
By leveraging professional expertise, you can ensure that your QBI deduction is calculated accurately, avoid costly mistakes, and free up time to focus on growing your business. Don’t leave money on the table - partner with Global FPO today and take control of your financial future!

FAQs

1.    Who is eligible to use Form 8995?
Form 8995 can be used by small business owners who operate a pass-through entity (sole proprietorship, partnership, or S corporation) and whose taxable income is below the IRS threshold ($182,100 for single filers and $364,200 for joint filers in 2023).

2.    What is the difference between Form 8995 and Form 8995-A?
Form 8995 is a simplified version for those within the income limits, while Form 8995-A is for more complex situations, such as when taxable income exceeds the threshold or involves multiple businesses.

3.    Does all business income qualify for the QBI deduction?
No, not all income qualifies. The deduction applies to qualified business income (QBI), which includes net profits from eligible businesses. It does not include capital gains, dividends, interest income, or wages paid to employees.

4.    What happens if my income is above the threshold?
If your taxable income exceeds the IRS threshold, limitations and phase-outs may apply. You will need to use Form 8995-A, and your deduction may be reduced based on factors like W-2 wages paid by the business or the value of business property.

5.    How can Global FPO help with my QBI deduction?
Global FPO offers expert tax consulting and bookkeeping services to help small business owners maximize their deductions, ensure accuracy, and comply with IRS regulations. Their professionals can assist with Form 8995 filing, tax planning, and financial strategy to help businesses save more money.