Draft Instructions to 2019 Form 8995 Contain More Informal IRS Guidance on Computing QBI

The IRS has released a draft of the instructions for the 2019 Form 8995, Qualified Business Income Deduction Simplified Computation.[1]  The instructions contain some additional information about items that are/are not considered part of QBI, at least in the of the IRS authors of the forms.

One key addition is a 2-page, 17 step flowchart to compute QBI on pages 4 and 5.

QBI Flowchart from 2019 Draft 8995 Instructions, First Page

QBI Flowchart from 2019 Draft 8995 Instructions, First Page

QBI Flowchart from 2019 Draft 8995 Instructions, Second Page

QBI Flowchart from 2019 Draft 8995 Instructions, Second Page

The instructions also contain additional information that may clarify the agency’s position on certain deductions.  For instance, the instructions contain the following details on items to be included in computing QBI:

Determining Your Qualified Business Income

Your QBI includes 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 U.S. This includes income from partnerships (other than PTPs), S corporations, sole proprietorships, certain estates and trusts that are included or allowed in figuring your taxable income for the year. To figure the total amount of QBI, the taxpayer must consider all items that are related to the trade or business. This includes, but not limited to, charitable contributions, unreimbursed partnership expenses, business interest expense, deductible part of self-employment tax, self-employment health insurance deduction, and contributions to qualified retirement plans.[2]

The inclusion of charitable contributions had been a matter of speculation, but the instructions would indicate that a charitable contribution made on behalf of a business would reduce qualified business income, even though it is not a deduction under IRC §162.

As well, box 2 of the flowchart explicitly states that interest expense paid by a taxpayer for the purchase of a partnership interest or S corporation stock would impact QBI, presumably to the extent that the partnership or S corporation has a §162 trade or business and therefore is creating QBI.[3]

The instructions also explicitly provide that a failure of a rental undertaking to meet the safe harbor found in Notice 2017-09 does not mean the rental may not otherwise be a §162 trade or business for purposes of §199A.

The ownership and rental of real property may constitute a trade or business if it meets the standard described above. Also, Notice 2019-07 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.[4]

The instructions also contain the reminder that an item does not impact QBI until it is included in computing taxable income:

Note. Your QBI doesn’t 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 your taxable income for the year. These losses are taken into account in the tax year they are included in determining your taxable income.[5]

The draft instructions also contain a hint about what the instructions to passthrough entities will require to be included with K-1s in 2019.  In July the IRS released a draft Form 1120S Schedule K-1 that contained only a single code for §199A information for 2019, down from the four codes that reported single numbers on 2018 K-1s.[6] 

While the instructions for that form are not yet available, the Form 8995 instructions indicate some of what those instructions will require of passthrough entities to be provided to those receiving K-1s:

Determining if items included on Schedule K-1 are included 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 included in your QBI. To figure if the item of income, gain, deduction, or loss is included in QBI you must look to how it’s 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, 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 capital gain or loss. See the QBI Flow Chart, below to figure if an item of income, gain, deduction, or loss is included in QBI.[7]

[1] https://www.irs.gov/pub/irs-dft/i8995--dft.pdf, August 29, 2019, retrieved August 30, 2019

[2] Ibid, p. 2

[3] Ibid, p. 4

[4] Ibid, p. 1

[5] Ibid, p. 2

[6] Ed Zollars, “Draft Schedule K-1, Form 1120S Consolidates §199A Information to a Single Code for 2019,” Current Federal Tax Developments website, July 29, 2019, retrieved August 30, 2019

[7] https://www.irs.gov/pub/irs-dft/i8995--dft.pdf, August 29, 2019, pp. 2-3