2018 Form 8995: QBI Deduction Rules and Calculation
Understand the mechanics of the 2018 simplified QBI deduction. This guide clarifies how Form 8995 determined the 20% pass-through tax break for taxpayers.
The introduction of the Tax Cuts and Jobs Act (TCJA) brought changes to the tax landscape, including a new deduction for owners of pass-through businesses. For the 2018 tax year, this created the need for a method to calculate the Qualified Business Income (QBI) deduction. To address this, the IRS included a “Qualified Business Income Deduction-Simplified Worksheet” in the 2018 Form 1040 instructions, designed to offer a direct calculation path for most eligible taxpayers.
Eligibility for the Simplified Calculation in 2018
Use of the simplified QBI worksheet in 2018 was determined by an income-based test based on a taxpayer’s taxable income before the QBI deduction. For the 2018 tax year, the threshold was $157,500 for individuals with a filing status of single, married filing separately, head of household, or qualifying widow(er). For those who were married and filing a joint return, the threshold was $315,000.
Taxpayers whose 2018 income fell at or below these established limits were directed to use the simplified worksheet. This income test was the sole determinant for using the simplified calculation. The nature of the business, whether it was classified as a Specified Service Trade or Business (SSTB), did not affect eligibility for the simplified method if the income condition was met.
Conversely, individuals and couples with taxable income exceeding these 2018 thresholds were required to complete a more complex QBI calculation. This more detailed version included additional computations related to W-2 wages and the unadjusted basis of qualified property.
Information Required for Completion
Before a taxpayer could calculate their deduction, several pieces of information had to be gathered. The taxpayer had to identify the name and Taxpayer Identification Number (TIN) for each distinct trade or business that generated qualified income. This ensured that income from different sources was properly accounted for separately.
A central component for the calculation was the net Qualified Business Income (QBI) from each of these businesses. For 2018, QBI was defined as the net profit from a qualified trade or business operating within the United States. This figure came from sources like a Schedule C for a sole proprietorship, or a Schedule K-1 from a partnership or an S corporation.
Defining QBI also involved understanding what to exclude. Taxpayers had to ensure their QBI figure did not include certain types of income, such as:
- Amounts received as W-2 wages from employment
- Any net capital gains or losses
- Most forms of dividend and interest income
- Any income that was earned from business activities conducted outside the United States
Beyond income from primary business operations, the 2018 calculation also required reporting two other types of investment income. Taxpayers needed the total amount of any qualified Real Estate Investment Trust (REIT) dividends and the total qualified income from Publicly Traded Partnerships (PTPs). These figures were necessary for the overall deduction calculation.
Calculating the 2018 Deduction
The calculation process on the 2018 worksheet was a direct, multi-step procedure. The taxpayer would begin by entering the individual QBI amounts from each trade or business. These amounts were then combined with any qualified REIT dividends and qualified PTP income to arrive at a total QBI amount.
The next step involved the first computation. The total QBI amount was multiplied by 20% (or 0.20). This calculation determined the potential deduction based purely on the qualified business income and related investment income, representing the full benefit envisioned by the Section 199A provision for taxpayers not subject to further limitations.
Following this, a second, separate calculation was required to establish a potential limitation on the deduction. This step involved taking the taxpayer’s taxable income before the QBI deduction and subtracting any net capital gain. The resulting figure was then also multiplied by 20%. This created a ceiling for the deduction, ensuring it did not disproportionately reduce a taxpayer’s overall tax liability relative to their total income.
The allowable QBI deduction for the 2018 tax year was the lesser of the two amounts: 20% of the total QBI or 20% of the taxable income minus net capital gain. Once this final deduction amount was determined, it was carried over and reported on line 9 of the 2018 Form 1040, U.S. Individual Income Tax Return.