TAXPAYER-BENEFICIAL CHANGE IN DRAFT INSTRUCTIONS TO 2020 QUALIFIED BUSINESS INCOME FORM

05 November 2020

Draft instructions for 2020 Form 8995, Qualified Business Income Deduction Simplified Computation

The draft instructions for 2020 Form 8995, Qualified Business Income Deduction Simplified Computation, contain a change that indicates that IRS no longer believes that charitable contributions must be deducted in computing qualified business income (QBI) for purposes of computing the QBI deduction.

Background. The Code provides a deduction of up to 20% of QBI from a U.S. trade or business operated as a sole proprietorship or through a partnership, S corporation, trust, or estate. (Code Sec. 199A(a)(1); Code Sec. 199A(b)(1))

QBI means, for any tax year, the net amount of qualified items of income, gain, deduction, and loss with respect to any qualified trade or business of the taxpayer. (Code Sec. 199A(c)(1))

Code Sec. 199A(c)(3)(A) defines “qualified items of income, gain, deduction, and loss” as items of income, gain, deduction, and loss that are effectively connected to the conduct of a trade or business within the United States.

Form 8995 is used to compute the QBI deduction.

Change to Form 8995 instructions. The 2020 draft instructions to Form 8995 contain a significant change from their 2019 counterpart.
The 2019 Form 8995 instructions provide:

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 United States. 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, you must consider all items that are related to the trade or business. This includes, but isn’t 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.

In the 2020 draft PDF of the instructions, the last sentence of the above paragraph is:

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.

Observation. Thus, the words “charitable contributions” have been omitted in the 2020 draft instructions.

Observation. However, to date, IRS has not published anything that definitively states that it no longer considers charitable contributions as deductions in computing QBI.