IRS Releases Draft Tax Forms to Compute Qualified Business Income Deduction under Internal Revenue Code (IRC) Section 199A


 

The IRS has released two draft forms which are to be used to compute the qualified business income deduction under IRC Section 199A . The draft forms are Form 8995 (Qualified Business Income Deduction Simplified Computation) and Form 8995-A (Qualified Business Income Deduction). For 2018, the IRS did not issue a tax form for taxpayers to compute the IRC Section 199A qualified business income deduction; some taxpayers were able to use the worksheet (2018 Qualified Business Income Deduction-Simplified Worksheet) in the Instructions to the 2018 Form 1040.

The Draft Form 8995 is comprised of one section (17 lines) with a fairly straightforward computation of the qualified business income (taking into account any real estate investment trust (REIT) dividends and publicly traded partnership (PTP) income (or loss)). Draft Form 8995 is similar to the 2018 Qualified Business Income Deduction-Simplified Worksheet in the Instructions to the 2018 Form 1040. Taxpayers are instructed to file Form 8995, rather than Form 8995-A, if their taxable income is not more than $160,700 for single and head of household returns; $160,725 if married filing separately; and $321,400 if married filing jointly, and the taxpayer is not a patron of an agricultural or horticultural cooperative.

The Draft Form 8995-A contains four sections and four schedules covering the computation of the qualified business income deduction. The sections are:

Part I. Trade, business, or aggregation information

Taxpayers are instructed to complete Schedules A, B, C, and/or D, as applicable, before starting Part I, and to attach additional worksheets where needed. In Part I, the taxpayer is provided with three lines (A, B, and C) to: (a) list the trade, business, or aggregation name for up to three businesses, etc.; (b) check a box if the business is a specified service; (c) check a box if aggregation applies; (d) provide the business’s taxpayer identification number; and (e) check another box if the business is an agricultural and horticultural cooperative patron.

Part II. Determine your adjusted qualified business income

This part provides a computation of the qualified business income, taking into account the general 20% limitation, the two (50% and 2.5%) W-2 wage limits, and the allocable share of unadjusted basis immediately after acquisition (UBIA) of qualified property. The form allows taxpayers to skip the limitation computations if their taxable income for 2019 is $160,700 or less for single and head of household returns, $160,725 if married filing separately, and $321,400 if married filing jointly. This section also takes into account the phase-in reduction, as figured in Part III, if the taxpayer’s taxable income is above these thresholds.

Part III. Phased-in reduction

Taxpayers complete Part III only if their taxable income for 2019 is more than $160,700 but less than $210,700 for single and head of households; is more than $160,725 but less than $210,725 if married filing separately; and is more than $321,400 but less than $421,400 if married filing jointly. The amount of the phase-in reduction is the amount that bears the same ratio to the excess amount as the amount by which the taxpayer’s taxable income for the year exceeds the threshold amount, bears to $50,000 ($100,000 for a joint return). The excess amount is the excess of 20% of the taxpayer’s qualified business income (QBI) from a qualified trade or business (determined without regard to this rule), over the greater of 50% of W-2 wages, or 25% of W-2 wages plus 2.5% of the UBIA of qualified property (determined without regard to this rule).

Part IV. Determine your qualified business income deduction

To determine the Code Sec. 199A deduction, taxpayers start with the total qualified business income component from all qualified trades, businesses, or aggregations from Part II, line 16. In many ways, this part resembles the Draft Form 8995’s computation of the qualified business income (taking into account REIT dividends and PTP income (or loss)); capital gains; the qualified business income deduction limitation.

The Draft Form 8995-A contains four schedules:

Schedule A. Specified service trades or businesses

Taxpayers are advised to complete Schedule D before beginning Schedule A. Taxpayers complete Schedule A only if their trade or business is a specified service trade or business and their taxable income is more than $160,700 but less than $210,700 for single and head of households; $160,725 but less than $210,725 if married filing separately; and $321,400 but less than $421,400 if married filing jointly. Taxpayers don’t file Form 8995-A if their taxable income isn’t more than $160,700 for single and head of households; $160,725 if married filing separately; and $321,400 if married filing jointly, and the taxpayer isn’t a patron of an agricultural or horticultural cooperative, don’t file this form; instead, they file Form 8995. Taxpayers with a specified service trade or a business with taxable income that is more than $210,700 for single and head of household returns; $210,725 if married filing separately; and $421,400 if married filing jointly) do not qualify for the QBI deduction. Schedule A includes two parts: Part I, Non-Publicly Traded Partnership, and Part II, Publicly Traded Partnership.

Schedule B. Aggregation of business operations

This schedule requires the taxpayer to provide a description of the aggregated trade or business and an explanation of the factors that allowed the aggregation in accordance with Reg. §1.199A-4. A taxpayer that holds a direct or indirect interest in a relevant pass-through entity (RPE; i.e., a partnership (other than a PTP) or an S corporation that is owned, directly or indirectly, by at least one individual, estate, or trust) that aggregates multiple trades or businesses must attach a copy of the RPE’s aggregations.

The schedule also asks if the trade or business aggregation has changed from the prior year, including changes in the aggregation due to a trade or business being formed, acquired, disposed of, or ceasing operations. If so, the taxpayer must provide an explanation.

Schedule C. Loss Netting and Carryforward

If an individual’s QBI from at least one trade or business (including an aggregated trade or business) is less than zero, the individual must offset the QBI attributable to each trade or business (or aggregated trade or business) that produced net positive QBI with the QBI from each trade or business (or aggregated trade or business) that produced net negative QBI in proportion to the relative amounts of net QBI in the trades or businesses (or aggregated trades or businesses) with positive QBI. If an individual’s QBI from all trades or businesses combined is less than zero, the QBI component is zero for the tax year. This negative amount is treated as negative QBI from a separate trade or business in the individual’s succeeding tax years. This carryover rule doesn’t affect the deductibility of the loss for purposes of other Code provisions.

Schedule D. Special rules for patrons of agricultural or horticultural cooperatives (Coop)

Specified agricultural or horticultural cooperatives are allowed a deduction for income attributable to domestic production activities that is similar to the domestic production activities deduction under former Section 199. Specified agricultural or horticultural cooperatives are cooperatives, to which Part I of subchapter T applies, that are engaged in the manufacturing, production, growth or extraction in whole or significant part of any agricultural or horticultural product, or in the marketing of agricultural or horticultural products.

For more information about this article, please contact our tax professionals at taxalerts@windes.com or toll free at 844.4WINDES (844.494.6337).

Learn more about our Tax & Accounting Services practice