What this line means
Line 12 multiplied by 20%. This is the maximum QBI deduction allowed based on your taxable income. Your actual deduction on line 14 is the smaller of line 9 (the 20% QBI/REIT component) or this line. Congress designed this cap to prevent the deduction from exceeding 20% of your non-capital-gain income. 1
Does this apply to you?
- You have positive taxable income after removing capital gains (line 12 is greater than zero)
- You want to determine whether your QBI deduction is limited by income
- Your QBI component on line 9 is large relative to your taxable income
- Your line 12 is zero, making this line zero and eliminating the QBI deduction entirely
Easy to overlook
The income limitation can be the binding constraint even for moderate-income filers A sole proprietor with $80,000 in QBI but only $60,000 in taxable income (after the standard deduction) has a QBI component of $16,000 (20% of $80,000) but an income limitation of $12,000 (20% of $60,000). The deduction is capped at $12,000. This happens more often than filers expect, especially when standard or itemized deductions are large. 2 IRS Publication 535 — Qualified Business Income Deduction
A large standard deduction reduces taxable income and tightens this cap Your taxable income on line 10 is after the standard or itemized deduction. A married couple taking the $30,000 standard deduction reduces their taxable income — and therefore this income limitation — by $6,000 (20% of $30,000). The deduction that helps you also reduces this separate deduction. 3 IRS Form 8995 Instructions — Line 13
Watch out for this
Assuming the income limitation never matters because you use the simplified form. The simplified Form 8995 is for filers under the specified service trade income thresholds, but the 20% income limitation on this line applies to everyone. Even filers well below the income threshold can have their QBI deduction reduced by this line if their taxable income is low relative to their QBI.
Footnotes
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IRS Form 8995 Instructions, Line 13. 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 10 through 13. https://www.irs.gov/instructions/i8995 ↩