S corporations and partnerships.

S corporations and partnerships don’t file Form 8995-A because they’re not eligible for the deduction. Instead, S corporations and partnerships must pass through to their shareholders or partners the necessary information on an attachment to Schedule K-1.

See the Instructions for Form 1120-S, U.S. Income Tax Return for an S Corporation, and Form 1065, U.S. Return of Partnership Income.

Cooperatives.

Cooperatives don’t file Form 8995-A because they’re not eligible for the deduction. Instead, cooperatives must provide the necessary information to their patrons on Form 1099-PATR or an attachment to help eligible patrons figure their deduction. Certain agricultural or horticultural cooperatives may qualify for a deduction under section 199A(g).

See the Instructions for Form 1120-C, U.S. Income Tax Return for Cooperative Associations.

Estates and trusts.

To the extent that a grantor or another person is treated as owning all or part of a trust or estate, the owner will compute its QBI deduction for the portion of the trust owned as if section 199A items had been received directly by the owner. Generally, in the case of a non-grantor trust or estate, the trust or estate may either claim the QBI deduction or provide information to their beneficiaries. In determining the QBI deduction or the information that must be provided to beneficiaries, the estate or trust allocates section 199A items based on the relative proportion of the estate's or trust's distributable net income (DNI) for the tax year distributed (or required to be distributed) to the beneficiary or retained by the estate or trust. If the estate or trust has no DNI for the tax year, section 199A items are allocated entirely to the estate or trust.

Estates and trusts may compute their own QBI deduction to the extent section 199A items are allocated to the estate or trust. However, section 199A items allocated to beneficiaries aren’t includible in the estate’s or trust’s QBI deduction computation. See the Instructions for Form 1041, U.S. Income Tax Return for Estates and Trusts.

Electing Small Business Trusts (ESBT).

An ESBT is required to compute the QBI deduction separately for the S and non-S portions of the trust. If applicable, the Form 8995-A used to compute the S portion’s QBI deduction must be attached as a PDF to the ESBT Tax Worksheet filed with Form 1041, and the trust must indicate that the information is applicable to the S portion only, by writing “ESBT” in the top margin of the Form 8995-A. See the Instructions for Form 1041.

Determine your QBI component.

To figure your QBI deduction, you must first determine your QBI component. Your QBI component is generally 20% of your QBI from your domestic trades or businesses. However, if your taxable income (before the QBI deduction) exceeds the threshold ($364,200 if married filing jointly, and $182,100 for all other returns), your QBI for each of your trades or businesses may be partially or fully reduced to the greater of 50% of W-2 wages paid by the qualified trade or business, or 25% of W-2 wages plus 2.5% of the UBIA of qualified property from the qualified trade or business. The partial or full reduction to QBI is determined by your taxable income. If your taxable income (before the QBI deduction) is:

Also, if you’re a patron of an agricultural or horticultural cooperative, you must reduce your cooperative QBI by the lesser of:

Determining your qualified trades or businesses.

Your qualified trades and businesses generally include your trades or businesses for which you’re allowed a deduction for ordinary and necessary business expenses under section 162. However, trades or businesses conducted by corporations and the performance of services as an employee are never qualified trades or businesses. Specified service trades or businesses (SSTBs) aren’t qualified trades or businesses for taxpayers with taxable income, before the QBI deduction, above the threshold and phased-in range.

As provided in section 162, an activity qualifies as a trade or business if your primary purpose for engaging in the activity is for income or profit and you’re involved in the activity with continuity and regularity.

If you own an interest in a pass-through entity, the trade or business determination is made at the entity level. Material participation under section 469 isn’t required to qualify for the QBI deduction. Eligible taxpayers with income from a trade or business may be entitled to the QBI deduction if they otherwise satisfy the requirements of section 199A.

The ownership and rental of real property may constitute a trade or business if it meets the standard described above. Also, Revenue Procedure 2019-38 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 is a section 162 trade or business.

Also, the rental or licensing of 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.

Services performed as an employee excluded from qualified trades or businesses.

The trade or business of performing services as an employee isn’t a trade or business for purposes of section 199A. Therefore, any amounts reported onForm W-2, box 1, other than amounts reported in box 1, if “Statutory Employee” on Form W-2, box 13, is checked, aren’t QBI. If you were previously an employee of a business and continue to provide substantially the same services to that business after you’re no longer treated as an employee, there is a presumption that you’re providing services as an employee for purposes of section 199A for the 3-year period after ceasing to be an employee. You may rebut this presumption on notice from the IRS by providing records such as contracts or partnership agreements that corroborate your status as a nonemployee. See Pub. 15-A, Employer’s Supplemental Tax Guide, and Pub. 1779, Independent Contractor or Employee.

SSTBs excluded from your qualified trades or businesses.

SSTBs are generally excluded from the definition of a qualified trade or business if the taxpayer's taxable income exceeds the threshold plus the phase-in range. Therefore, no QBI, W-2 wages, or UBIA of qualified property from the specified service trade or business are taken into account in figuring your QBI deduction. If the SSTB is conducted by your pass-through entity, the same limitation applies to the pass-through items.

Exception 1: If your 2023 taxable income before the QBI deduction isn’t more than $364,200 if married filing jointly, and $182,100 for all other returns, your SSTB is treated as a qualified trade or business, and thus may generate income eligible for the QBI deduction.

Exception 2: If your 2023 taxable income before the QBI deduction is more than $364,200 but not more than $464,200 if married filing jointly, $182,100 and $232,100 for all other returns, an applicable percentage of your SSTB is treated as a qualified trade or business, you must complete Schedule A (Form 8995-A).

An SSTB is any trade or business providing services in the fields of:

De minimis rule 1. If your gross receipts from a trade or business are $25 million or less and less than 10% of the gross receipts are from the performance of services in a specified service field, then your trade or business isn’t considered an SSTB, and thus may generate income eligible for the QBI deduction for the tax year, regardless of your taxable income.

De minimis rule 2. If your gross receipts from the trade or business are more than $25 million and less than 5% of the gross receipts are from the performance of services, then your trade or business isn’t considered an SSTB, and thus may generate income eligible for the QBI deduction for the tax year, regardless of your taxable income.

De minimis rule 3. If your trade or business provides services or property to an SSTB and there is 50% or more common ownership of the trades or businesses, that portion of the business that provides services or property to the SSTB is treated as a separate SSTB concerning the common owners.

Aggregation.

If you’re engaged in more than one trade or business, each trade or business is a separate trade or business for purposes of applying the W-2 wage limitation or UBIA of qualified property limitation, discussed later. However, you may choose to aggregate multiple trades or businesses into a single trade or business for purposes of applying the limitations if you meet the following requirements.

If a relevant pass-through entity (RPE) aggregates multiple trades or businesses, you must attach the RPE’s aggregations to your Schedule B (Form 8995-A). You may not separate the trades or businesses aggregated by the RPE, but you may add additional trades or businesses to the aggregation, assuming the rules above are met. If you choose to aggregate multiple trades or businesses, complete Schedule B (Form 8995-A) before starting Part I of Form 8995-A.

Your aggregations must be reported consistently for all subsequent years, unless there is a significant change in facts and circumstances that disqualify the aggregation. Schedule B (Form 8995-A) must be completed each year to show your trade or business aggregation(s) and must include any aggregation of an RPE in which you hold a direct or indirect interest. Failure to disclose such aggregated trades or businesses may cause them to be disaggregated.

Determining your QBI.

Your QBI includes qualified items of income, gain, deduction, and loss from your trades or businesses that are effectively connected with the conduct of a trade or business in the United States. This includes qualified items from partnerships (other than PTPs), S corporations, sole proprietorships, and certain estates and trusts that are allowed in calculating your taxable income for the year.

To figure the total amount of QBI, you must consider all items that are attributable to the trade or business. This includes, but isn’t limited to, unreimbursed partnership expenses, business interest expense, deductible part of self-employment tax, self-employment health insurance deduction, and contributions to qualified retirement plans. QBI doesn’t include any of the following.

Losses or deductions from a qualified trade or business that are suspended by other provisions of the Internal Revenue Code are not qualified losses or deductions and therefore, are not included in your QBI for the year. Such Code provisions include, but aren’t limited to, sections 163(j), 179, 461(l), 465, 469, 704(d), and 1366(d). Instead, qualified losses and deductions are taken into account in the tax year they’re included in calculating your taxable income.

When losses or deductions are suspended, you must determine the qualified portion of the losses or deductions that must be included in QBI in subsequent years when allowed in calculating your taxable income. In general, losses and deductions incurred prior to 2018 are not qualified losses or deductions and are not included in QBI in the year they are included in calculating taxable income.

If a loss or deduction is partially suspended, only the portion of the allowed loss or deduction attributable to QBI must be considered when determining QBI from the trade or business in the year the loss or deduction is incurred. The portion of the allowed loss or deduction attributable to QBI is determined by first calculating the percentage of the total loss attributable to QBI by dividing the portion of the total loss attributable to QBI by the overall total loss. The allowed loss or deduction is then multiplied by this percentage to determine the portion of the allowed loss or deduction attributable to QBI.

If your trade or business is an SSTB, whether the trade or business is a qualified trade or business is determined based on your taxable income in the year the loss or deduction is incurred. If your taxable income is within the phase-in range in that year, you must determine and apply the applicable percentage in the year the loss or deduction was incurred to determine the qualified portion of the suspended loss or deduction.

Losses and deductions retain their status as either qualified or non-qualified from year to year while suspended. Therefore, you must track each category of loss or deduction until the loss or deduction is no longer suspended. For an example of a reasonable method to track and compute the amount of previously disallowed losses or deductions to be included in your QBI deduction calculation in the year allowed, see Tracking Losses or Deductions Suspended by Other Provisions , later.

When losses or deductions previously suspended by other Code provisions are allowed in calculating taxable income, the qualified portion of the loss or deduction allowed under each provision is treated as a qualified net loss carryforward from a separate trade or business when calculating the current year’s QBI deduction.

Any qualified loss or deduction from an SSTB allowed in calculating taxable income isn’t included on the Schedule A (Form 8995-A) as the applicable percentage was previously determined and applied in the year the loss or deduction was incurred and should not be redetermined in the year the loss or deduction is allowed.

Determining whether items included on Schedule K-1 are includible in QBI.

The amounts reported on your Schedule K-1 as “QBI/Qualified PTP Items Subject to Taxpayer-Specific Determinations” from a partnership, S corporation, estate, or trust aren’t automatically includible in your QBI. To determine if the item of income, gain, deduction, or loss is includible in QBI, you must look to how it is reported on your federal income tax return. For example, ordinary business income or loss is generally included in QBI if it was used in computing your taxable income and not excluded, suspended, or disallowed under any other Code section. Also, a section 1231 gain or loss is only includible in QBI if it isn’t capital gain or loss. See the QBI Flow Chart, later, to determine if an item of income, gain, deduction, or loss is includible in QBI.

Determining whether information reported on your Form 1099-PATR is includible in QBI.

The amounts reported to you as your share of patronage dividends and similar payments on Form 1099-PATR aren’t automatically includible in your QBI. Payments may be included in QBI to the extent they are (1) related to your trade or business, (2) reported to you by the cooperative as qualified items of income on an attachment to Form 1099-PATR, and (3) not payments reported as from an SSTB, unless your taxable income is below the threshold, in which case payments from SSTBs are includible in your QBI.

If you received qualified payments reported to you on Form 1099-PATR from a specified agricultural or horticultural cooperative, you’re required to reduce your QBI by the patron reduction. See Schedule D (Form 8995-A) Special Rules for Patrons of Agricultural or Horticultural Cooperatives, later.

Determining whether items included on Schedule C (Form 1040) are includible in QBI.

The net gain or loss as reported on your Schedule C (Form 1040) isn’t automatically includible in your QBI. See the QBI Flow Chart, later, to determine if an item of income, gain, deduction, or loss is includible in QBI.

QBI Flow Chart.

Use the flow chart to determine if an item of income, gain, deduction, or loss is includible in QBI. See the QBI Flow Chart, later.

Determining your W-2 wages for limitation purposes.

W-2 wages generally include amounts paid to employees for the performance of services, plus elective deferrals (for example, contributions to 401(k) plans, deferred compensation, and Roth IRA contributions). Amounts paid to statutory employees aren’t W-2 wages when the “Statutory Employee” box on Form W-2, box 13, is checked.

If you conduct more than one trade or business, the W-2 wages must be allocated among the various trades or businesses (or aggregated trades or businesses) to the trade or business that generated the wage expense. Also, only the W-2 wages properly allocable to QBI are includible. W-2 wages are properly allocable to QBI if the associated wage expense is taken into account in computing QBI.

Before allocating W-2 wages among various trades or businesses (or aggregated trades or businesses) and/or allocating W-2 wages to QBI, first determine the total amount of W-2 wages. There are three methods to figure your W-2 wages.

Short tax year.

If you have a short tax year, you must use the tracking wages method and do the following.

However, if you have a short tax year that doesn't include a calendar year ending within that short tax year, the following wages are treated as W-2 wages for a short year.

Acquisition or disposition of a trade or business.

If you acquired or disposed of a trade or business that causes you and another employer to pay W-2 wages to employees of the acquired or disposed of trade or business during the calendar year, then the W-2 wages for the calendar year of the acquisition or disposition are allocated between each employer based on the period that the employees of the acquired or disposed of trade or business were employed by each employer. If you have a short tax year that doesn’t include a calendar year ending within your short tax year, see Short tax year, earlier.

Non-duplication rule.

Amounts that are treated as W-2 wages for a tax year under any method can't be treated as W-2 wages for any other tax year. Also, an amount can't be treated as W-2 wages by more than one taxpayer.

Determining your UBIA of qualified property.

For purposes of determining your UBIA for all qualified property, the unadjusted basis immediately after acquisition means the basis on the placed-in-service date. Qualified property includes tangible property subject to depreciation under section 167 held, and used in the production of QBI, by the trade or business (or aggregated trades or businesses) during and at the close of the tax year, for which the depreciable period hasn’t ended before the close of the tax year. The depreciable period ends on the later of 10 years after the property is first placed in service by you or the last day of the last full year in the applicable recovery period under section 168(c). Additional first-year depreciation under section 168 doesn’t affect the applicable recovery period.

Improvements to property that has already been placed in service are treated as separate qualified property.

For qualified replacement property acquired in a section 1031 exchange that’s of a like-kind to the qualified relinquished property, or for qualified replacement property acquired in a section 1033 involuntary conversion that’s similar or related in service or use to the qualified converted property, the UBIA of the qualified replacement property is the same as the UBIA of the qualified property exchanged, converted, decreased by excess boot, or increased by the amount of money paid or the fair market value of property transferred by the taxpayer that isn’t of a like-kind or similar or related in service or use.

Generally, replacement property retains the same placed-in-service date as that of the relinquished property. However, for the portion of the replacement property’s UBIA that exceeds the relinquished property’s UBIA, that portion is treated as separate qualified property placed in service on the date on which the replacement property is first placed in service.

Generally, property received in a nonrecognition transaction (section 332, 351, 361, 721, or 731) retains the same UBIA and placed-in-service date as that of the transferor. However, for the portion of the transferee’s UBIA that exceeds the transferor’s UBIA, that portion is treated as separate qualified property placed in service on the date of the transfer.

Property acquired within 60 days of the year end that’s disposed of within 120 days without being used by the trade or business for at least 45 days is generally not qualified property.

A net operating loss

under section 172 is generally figured without the QBI deduction, meaning the QBI deduction can’t create or increase the net operating loss. However, an excess business loss under section 461(l) is treated as a net operating loss carryforward to the following tax year and is taken into account for purposes of computing QBI in the subsequent tax year in which it is deducted.

Alternative minimum tax.

The QBI deduction used to determine regular tax is also used to determine alternative minimum taxable income.

Net earnings from self-employment

aren’t reduced by the QBI deduction when computing self-employment tax.

Net investment income

isn’t reduced by the QBI deduction when computing net investment income tax.

Puerto Rico.

For purposes of determining QBI, the United States includes Puerto Rico for taxpayers who have taxable income from sources within Puerto Rico that are subject to tax under section 1. Further, W-2 wages are figured by including W-2 wages paid for services performed in Puerto Rico without regard to section 3401(a)(8).

Taxable income before qualified business income deduction.

Form 8995-A, Part III, Part IV, and Schedule A (Form 8995-A) each ask for your taxable income figured without regard to the QBI deduction. Enter your taxable income figured before any QBI deduction, computed as follows.