How to Calculate Line 11 on Form 8995

IRS Form 8995, Qualified Business Income Deduction Simplified Computation, is used by many small business owners to calculate their Qualified Business Income (QBI) deduction. This deduction, established under Section 199A of the Internal Revenue Code, allows eligible owners of pass-through entities to lower their taxable income. The form involves several calculations, and this article focuses on the process for calculating Line 11, which represents your taxable income before the QBI deduction is applied.

Understanding Qualified Business Income

It is necessary to understand what income the Internal Revenue Service (IRS) considers to be Qualified Business Income (QBI). QBI is the net profit from a qualified trade or business, such as a sole proprietorship, partnership, or S corporation. It represents the operational profitability of the business. The calculation starts with the gross income of the business and subtracts the ordinary expenses incurred in its operation.

Certain types of income are specifically excluded from the QBI calculation. These exclusions include investment-related items such as capital gains and losses, certain dividends, and interest income that is not properly allocable to the business’s activities. Additionally, income earned as an employee, including reasonable compensation paid to an S corporation owner-employee or guaranteed payments made to a partner for services, does not qualify as QBI.

Information Needed to Calculate Line 11

To complete Form 8995, you must gather specific financial documents. The primary document is your business’s Profit and Loss (P&L) statement, also known as an income statement, for the tax year. This statement provides a summary of the revenues, costs, and expenses incurred during a specific period.

From the P&L statement, you will need to identify several figures. You must have the total gross receipts or sales, the cost of goods sold (COGS) if your business deals in products, and a list of all ordinary business expenses. These expenses include items like:

• Rent or lease payments
• Office supplies
• Utilities
• Salaries paid to non-owner employees

It is also important to identify deductions related to being self-employed that are taken on your personal tax return. These include the deductible portion of self-employment taxes, self-employed health insurance premiums, and contributions to self-employed retirement plans. These amounts reduce your business profit to arrive at the final QBI figure.

Calculating the Line 11 Amount

The calculation for Line 11 of Form 8995 is not a direct entry from your business records but is derived from your primary tax form, such as Form 1040. The instructions for Form 8995 direct filers to take their taxable income before the QBI deduction. This means you first determine your adjusted gross income (AGI) and then subtract either the standard or itemized deductions to arrive at a preliminary taxable income figure.

For a taxpayer filing Form 1040, the Line 11 amount is calculated by taking the figure from Line 11 of Form 1040 (Adjusted Gross Income) and subtracting the amount from Line 12 (Standard Deduction or Itemized Deductions). This resulting figure is what you will enter on Line 11 of Form 8995.

This amount on Line 11 serves as a limitation factor in the subsequent steps of the form. The final QBI deduction you can claim is subject to limits based on this taxable income figure. The deduction is limited to 20% of this taxable income amount (after it’s reduced by net capital gains), or the calculated QBI component, whichever is less. This ensures the deduction does not disproportionately reduce tax liability.