What this line means
Line 3 multiplied by 20%. This is the QBI portion of your total Section 199A deduction. If your combined QBI on line 3 is $100,000, this line is $20,000. The QBI component and the REIT/PTP component (line 8) are added together on line 9 to get your total deduction before the income limitation. 1
Does this apply to you?
- You have a positive amount on line 3 (total combined QBI greater than zero)
- You are a sole proprietor, partner, or S corporation shareholder with net business income
- You are using the simplified Form 8995 because your taxable income is at or below the threshold
- Your line 3 is zero, making this line zero as well
Easy to overlook
The 20% rate applies to net QBI, not gross business revenue QBI is your business income after subtracting business deductions — not your top-line revenue. A freelancer with $150,000 in gross income and $50,000 in business expenses has $100,000 in QBI, producing a $20,000 deduction on this line. Using gross revenue instead of net income overstates the deduction. 2 IRS Publication 535 — Qualified Business Income Deduction
Self-employment tax deduction reduces QBI before this calculation The deductible portion of self-employment tax (half of your SE tax from Schedule SE) reduces your QBI before it reaches line 1. If you skip this adjustment on your Schedule C income, your QBI is too high and this line is overstated. The SE tax deduction is allocated to the business that generated the self-employment income. 3 IRS Form 8995 Instructions — Line 4
Watch out for this
This 20% calculation is not the final deduction amount. The income limitation on lines 10 through 13 may reduce your actual deduction below the QBI component. Filers sometimes see this line and assume it is the final number, entering it on Form 1040 line 13a without completing the rest of the form.
Footnotes
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IRS Form 8995 Instructions, Line 4. https://www.irs.gov/instructions/i8995 ↩
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IRS Publication 535, Business Expenses, Chapter 12 (Qualified Business Income Deduction). https://www.irs.gov/pub/irs-pdf/p535.pdf ↩
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IRS Form 8995 Instructions, General Instructions — Determining QBI. https://www.irs.gov/instructions/i8995 ↩