What this line means
Line 10 minus line 11 — your taxable income with capital gains removed. If the result is zero or less, enter zero. This isolates the portion of your income that is not already taxed at preferential capital gains rates. The 20% income limitation on line 13 is based on this number. 1
Does this apply to you?
Easy to overlook
Large capital gains reduce the income limitation significantly If most of your taxable income comes from capital gains, this line is small — and the 20% limitation on line 13 is correspondingly small. A filer with $200,000 in taxable income and $150,000 in net capital gains has only $50,000 on this line, capping the QBI deduction at $10,000 regardless of how much QBI they have. 2 IRS Publication 535 — Qualified Business Income Deduction
Qualified dividends count as capital gains and reduce this line Because qualified dividends are included in net capital gain on line 11, they reduce the income available for the QBI limitation. A filer with significant qualified dividend income may find their QBI deduction limited even though their business income is substantial. 3 IRS Form 8995 Instructions — Line 12
Watch out for this
Entering a negative number when capital gains exceed taxable income. If line 11 is larger than line 10, the instructions require zero on this line. A negative number produces a negative income limitation on line 13, which makes no mathematical sense and will cause an error on your return.
Footnotes
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IRS Form 8995 Instructions, Line 12. https://www.irs.gov/instructions/i8995 ↩
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IRS Publication 535, Business Expenses, Chapter 12 — Income Limitation. https://www.irs.gov/pub/irs-pdf/p535.pdf ↩
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IRS Form 8995 Instructions, Lines 11 and 12. https://www.irs.gov/instructions/i8995 ↩