Form 8995-A is needed in some cases to report your qualified business income deductions.
If you own a business or are a partner or shareholder where your business income flows through to your personal tax returns and isn't subject to corporate taxes, the IRS considers it a "pass-through" business. The pass-through deduction lets partners or shareholders in a pass-through business deduct up to 20% of their share of qualified business income from their income. To claim this valuable tax break, you may need to file Form 8995-A.
Overview of the pass-through deduction
The 2017 Tax Cuts and Jobs Act (TCJA) created a new deduction for owners of pass-through entities. Business structures of pass-through entities can include:
The pass-through deduction, also known as the Qualified Business Income Deduction also known as the Section 199A deduction, has a few limitations based on the type of business you're in and the amount of income you earn. However, it's generally available for the 2021 tax year if you own a pass-through business and your total taxable income falls below $164,900 for single filers or $329,800 for joint filers.
If your income is above that threshold, your deduction will typically be less than 20% if your business is considered a "specified service trade or business." This includes:
- Law firms
- Medical practices
- Consulting firms
- Professional athletes
- Financial advisors
- Performing artists
- Investment managers
Other service-based professions where the business depends on the reputation or skill of its employees or owners can also fall into this category.
What is Form 8995-A?
There are two options for claiming the pass-through deduction on your return: Form 8995 and Form 8995-A. Form 8995 is a simplified version for taxpayers whose taxable income before the qualified business income deduction doesn't reach the threshold. Most other taxpayers claiming the pass-through deduction must use 8995-A.
For example, say you're a single taxpayer who owns a pass-through business, and your total taxable income before the qualified business income deduction for 2021 (line 15 of Form 1040) is $150,000. Since your income is below the $164,900 threshold for tax year 2021 mentioned above, you would calculate your pass-through deduction on the simplified form, Form 8995. However, if your total taxable income before the qualified business income deduction is $175,000, you would need to use 8995-A for tax year 2021 instead.
Understanding Form 8995-A
Form 8995-A is two pages long, with some fairly detailed sections. It has four parts and four additional schedules designed to help you figure out your deduction.
Part I: Trade, business, or aggregation information
In Part I, you can list up to three businesses. If you have more than one pass-through business, you can attach multiple 8995-A forms to your tax return.
This section also asks you to check a box if the business is a specified service business and provide its Taxpayer Identification Number.
Part II: Determine your adjusted qualified business income
This section allows you to calculate your qualified business income, taking into account all of the deduction's rules and limitations.
If your total taxable income is less than the phaseout limit, you can skip this section.
Part III: Phased-in reduction
You only need to complete this section if your taxable income is within the phaseout range. For 2021 tax returns, the phaseout range is $164,900 to $214,900 for single filers. For married couples filing jointly, the deduction phases out when your taxable income is between $329,800 and $429,800. When your income exceeds that range, you can't claim the deduction at all if your business is a specified service trade or business. Owners of other types of businesses may receive a smaller deduction if their income is greater than that upper limit.
Part IV: Determine your qualified business income deduction
This section is where you calculate your deduction, starting with your total qualified business income from Part II. If you have any qualified dividends from a real estate investment trust (REIT) or income from a publicly traded partnership (PTP), you'll add those amounts to your qualified business income before calculating the deduction.
Schedule A: Specified service trades or businesses
You only need to attach Schedule A if your business is a "specified service trade or business" and your total taxable income is within the phaseout range.
Schedule B: Aggregation of business operations
For non-specified service trades and businesses with income over the phaseout range, the deduction is limited by the business's W-2 wages or qualified property. However, if you have more than one pass-through business, you may be able to increase your pass-through deduction by combining the W-2 wages and qualified property of multiple businesses. This is called aggregation.
If you opt to aggregate two or more businesses, use Schedule B to:
- Describe each business
- Explain why it qualifies for aggregation
- Indicate whether the aggregation has changed since the prior year
You'll also need to list:
- The businesses you're aggregating
- Their Taxpayer Identification Numbers
- Qualified business income
- W-2 wages
- Qualified property
Schedule C: Loss netting and carryforward
If one of your businesses has negative qualified business income, you have to net that loss against your other entities' positive qualified business income in this section. You'll then have to carry forward any remaining loss to next year's tax return.
Schedule D: Special rules for patrons of agricultural or horticultural cooperatives
You only need to complete Schedule D if you're a patron of an agricultural or horticultural cooperative. This section allows you to calculate an extra deduction on your income from domestic production activities.
The rules, regulations, and forms for claiming the pass-through deduction can be challenging, but don't worry about knowing all of the rules and limitations when you file your taxes.
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