The IRS has released draft instructions to the draft Form 8995, Qualified Business Income Deduction Simplified Computation.
The Tax Cuts and Jobs Act (TCJA) created IRC § 199A, which allows a deduction to non-corporate taxpayers, including trusts and estates, who have qualified business income (QBI) from a partnership, S corporation, or sole proprietorship, in tax years beginning after Dec. 31, 2017 and before Jan. 1, 2026. The deduction is the lesser of: (a) the “combined qualified business income amount” of the taxpayer, or (b) 20% of the excess, if any, of the taxable income of the taxpayer for the tax year over the net capital gains (IRC § 199A(a)). QBI is the net amount of “qualified items of income, gain, deduction, and loss” relating to any qualified trade or business of the taxpayer (IRC § 199A(c)(1)).
In April, the IRS released two draft forms to be used in computing the qualified business income deduction: Form 8995, Qualified Business Income Deduction Simplified Computation, and Form 8995-A, Qualified Business Income Deduction. A later draft of Form 8995 was issued in July 2019. The IRS recently released instructions for the draft Form 8995 and indicated that a separate set of instructions for Form 8995-A will be issued in the future.
The draft instructions include a two-page flow chart that taxpayers can use to determine if an item of income, gain, deduction, or loss is included in QBI. The calculation of QBI, per the draft instructions, includes items from a taxpayer’s trade or business, including general business income and deduction items, as well as the following deductions: deductible tax on self-employment income, self-employed health insurance, contributions to qualified retirement plans, charitable deductions, unreimbursed partnership expenses, and interest expenses for the purchase of a partnership interest or S corporation stock. Also, the draft instructions point out that, while Notice 2019-7 provides a safe harbor under which a rental real estate enterprise is treated as a trade or business for purposes of the QBI deduction, rental real estate that doesn’t meet the requirements of the safe harbor may still be treated as a trade or business for purposes of the QBI deduction if it is a IRC § 162 trade or business.