IRS Draft Form 8995 Instructions Include Helpful QBI Flowchart
On August 29, 2019, IRS issued draft instructions for Form 8995, Qualified Business Income Deduction Simplified Computation. The instructions provide some useful soft guidance, as well as a new QBI flowchart. Detailed below are some highlights. We we will watch for the instructions for Form 8995-A.
The instructions explain a new reporting category for K-1s: QBI/Qualified PTP Items Subject to Taxpayer-Specific Determinations. The instructions state that these items are not automatically included in QBI. Instead, the character of the item will depend upon how it is reported on the taxpayer’s individual return. For example, the instructions state that ordinary business income or loss is generally included in QBI if it was used in computing taxable income, not excluded, suspended, or disallowed under any other section of the Code. Also, a section 1231 gain or loss is only includible in QBI if it is not a capital gain or loss.
The instructions state that amounts reported as a share of patronage dividends and similar payments on Form 1099-PATR are not automatically QBI. They may be included in QBI to the extent they are:
- Related to the taxpayer's trade or business
- Reported to the taxpayer as qualified income items on an attachment to Form 1099-PATR and
- Not payments reported as from an SSTB, unless the taxpayer's taxable income is below the threshold
Trade or Business Status
The instructions state that to be engaged in a trade or business under section 162, the activity must be conducted with continuity and regularity and the primary purpose for engaging in the activity must be for income or profit. The instructions continue:
- The ownership and rental of real property may constitute a trade or business if it meets this section 162 standard.
- Notice 20190=-07 provides a safe harbor under which a rental real estate enterprise will be 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’s a section 162 trade or business.
- The rental or licensing of real property to a commonly controlled trade or business operated by an individual or a pass-through entity is considered a trade or business under section 199A.
Losses and QBI
QBI does not include any losses or deductions disallowed under the basis, at-risk, passive loss, or section 461(l) excess business loss rules as losses limited or suspended under these rules aren't included in determining taxable income for the year. These losses are taken into account in the tax year they are included in determining taxable income.
This flowchart assists i determining whether an item of income, gain, deduction, or loss is QBI.
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