Do You Qualify for the Qualified Business Income Deduction Using Form 8995 or 8995-A?

Did you know the IRS allows certain business owners to deduct up to 20% of their Qualified Business Income (QBI)? This deduction could save you thousands on your taxes, but figuring out if you qualify—and which form to use—can be tricky. This article simplifies everything you need to know about using Form 8995 or 8995-A to claim your QBI deduction for the 2025 tax year.

What is Form 8995 and How Does it Simplify Filing?

Form 8995 is the simplified tax form for small business owners who want to claim the pass-through deduction created by the Tax Cuts and Jobs Act. If your total taxable income is below the threshold, this simplified form saves time and effort compared to the longer Form 8995-A.

When Should You Use Form 8995 Instead of 8995-A?

• Eligibility thresholds for taxable income:
  You can file Form 8995 if your 2024 total taxable income (before the qualified business income deduction) is below $197,300 for single filers or $394,600 for married filing jointly. If your income exceeds these amounts, or if you’re part of a cooperative, you’ll need to use Form 8995-A.
• Simpler structure:
  This simplified form has only 17 lines, compared to the detailed calculations on Form 8995-A. For eligible taxpayers, it reduces confusion and helps you figure out your deduction faster.

How to Fill Out Form 8995 Step-by-Step

Lines 1-4: Calculating Your Qualified Business Income

• Start by listing each pass-through business you own, including the Taxpayer Identification Number (TIN).
• Total your net qualified business income (or loss) and multiply it by 20% to get your preliminary deduction.
• If your qualified business income is negative, report the loss accurately to carry it forward to future years.

Lines 6-10: Factoring in REIT Dividends and PTP Income

• Include income from REIT dividends and Publicly Traded Partnerships (PTP) on these lines.
• Multiply the income from these types by 20% to calculate your additional deduction.

Lines 11-15: Applying Income Limitations

• If your income exceeds the threshold, you must calculate the deduction is the lesser of:
  • 20% of your net qualified business income, or
  • 20% of your taxable income before the qualified business deduction, minus capital gains.
• Use these lines to determine your final deduction amount.

Lines 16-17: Handling Loss Carryforwards

• If you had a qualified business loss in a previous year, report it here. This ensures that the loss offsets your share of qualified business income in the current year.

Further Reading: Understand the ins and outs of Qualified Business Income

Do You Qualify for the Pass-Through Deduction?

Understanding Pass-Through Entities and Their Benefits

A pass-through entity—like a sole proprietorship, LLC, partnership, or S corporation—allows business income to pass directly to your individual income tax return instead of paying corporate taxes. This means:

• Your income is taxed at your personal rate, avoiding double taxation.
• You can claim the pass-through deduction (also known as the Section 199A deduction) on your Form 1040 for up to 20 % of your share of qualified business income.

Income Thresholds and Limitations for 2025

• Thresholds for filing status:
  • For single filers, the deduction applies if your taxable income before the qualified business deduction is below $197,300.
  • For joint filers, the limit is $394,600.
• What happens if income exceeds the threshold:
  • If your income goes above these limits, additional rules apply, especially for certain professions like consulting or accounting, classified as specified service trades or businesses.
  • You may need to use Form 8995-A if the income phase-outs affect your calculation.

Maximizing Your QBI Deduction in 2025

What Types of Income Qualify for the Deduction?

To claim the deduction, it’s critical to understand what counts as Qualified Business Income (QBI):

• Included income: Profits from pass-through business structures, like sales revenue minus business expenses reported on Schedule C.
• Excluded income:
  • Capital gains or losses.
  • Dividends or foreign income.
  • Wages from self-employment tax or earned income tax credit.

If you earn non-qualifying income, your tax savings could be reduced.

Avoiding Common Mistakes

• Misreporting business losses:
  • If you incurred a qualified business loss, report it properly on your tax return to avoid penalties. Losses are carried forward and reduce future deductions.
• Forgetting REIT and PTP income:
  • Income from these investments qualifies for the deduction, so include them to claim the pass-through deduction using Form 8995.

By ensuring accurate reporting, you can maximize your tax savings and avoid filing errors.

Further Reading: Learn how to navigate your small business's qualified business income deduction

Using Form 8995 to Claim the Pass-Through Deduction

Step-by-Step Guide to Filing Form 8995

If you’re looking for tax tips for small-business owners, filing Form 8995 is the easiest way to claim the Qualified Business Income deduction—if your income falls below the threshold. Follow these steps to ensure your filing is accurate and saves you money:

Prepare key details:

• Taxpayer Identification Numbers (TINs) for each pass-through business.
• Total Qualified Business Income (QBI): This includes all net profits after subtracting expenses on Schedule C for sole proprietors or relevant deductions for partnerships, LLCs, or S corporations.
• Prior-year loss carryovers: If you reported losses in the past two tax years, these must be factored into this year’s deduction.

Calculate your pass-through deduction:

1. Determine your QBI: Subtract expenses, including sales tax, from your business income.
2. Multiply by 20%: This is your preliminary deduction.
3. Apply the income limitation: Compare 20% of your taxable income (minus capital gains) with the QBI-based calculation. Use the smaller number.

Filing correctly can lead to a larger refund or smaller tax due, reducing the overall burden on your federal tax return. If you’re unsure, consulting a tax expert or CPA is a good investment based on your tax situation.

When Form 8995-A Is Required

In some cases, you’ll need to use 8995-A instead of the simplified form. Here’s when this tax advice applies:

• Scenarios requiring Form 8995-A:
  • Your income falls above the 2025 thresholds: $197,300 for single filers or $394,600 for joint filers.
  • You’re a part of a cooperative or own a specified service trade or business (SSTB), which has stricter limits.
  • Your deductions are based on a more complex tax situation, requiring detailed calculations of phase-outs and adjustments.
• Why complexity matters:
  • Form 8995 is best for straightforward situations, but if your total qualified business income is high or involves special considerations, you would need to use 8995-A.
  • Form 8995 or Form 8995-A both aim to help you maximize deductions, but 8995-A provides space to include additional information, especially if your income exceeds the threshold or involves multiple entities.

If you’re unsure whether to file Form 8995 or Form 8995-A, a tax expert or CPA can help ensure your deductions align with the latest tax laws, leading to the best possible outcome based on your actual tax return.

Key Takeaways

• Using the simplified form (Form 8995) is ideal for tax filing if your income is below the threshold, saving time and effort.
• For more complex situations, such as higher incomes, you may have a smaller tax due from another form, like Form 8995-A.
• You are eligible for the QBI deduction if you meet income thresholds and properly calculate your pass-through income.
• Accurate tax filing ensures you minimize your tax due from another tax, like self-employment or federal tax obligations.
• A tax expert or CPA can help you maximize deductions and confirm compliance with tax laws tailored to your situation.

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