If you’ve used a DIY tax prep software the past few years and have an S-corporation, partnership, self-employment income, rental properties, or trust, you might be missing out on a substantial tax benefit called the Qualified Business Income (QBI) deduction. This deduction has been part of the tax code since 2018, yet many taxpayers are still unaware of its existence or how to claim it correctly.
What Is the Qualified Business Income (QBI) Deduction?
The QBI deduction, introduced as part of the Tax Cuts and Jobs Act (TCJA) of 2017, allows eligible taxpayers to deduct up to 20% of their qualified business income from their taxable income. This deduction applies to pass-through entities such as S-corporations, partnerships, sole proprietorships (Schedule C), rental properties (Schedule E), and certain trusts. It’s a significant tax break designed to provide similar tax rate reductions to business owners as those given to C-corporations under the TCJA.
The Problem: Missed Deductions
Unfortunately, not all tax preparation software automatically includes this deduction in the tax return. Inexplicably, many of the popular tax preparation platforms have been known to omit the necessary forms (8995 or 8995-A) from taxpayers’ returns. As a result, small business owners and self-employed individuals have missed out on this valuable tax deduction, potentially overpaying thousands of dollars in taxes each year.
Why Are These Deductions Being Missed?
The reasons behind this oversight are unclear, but it appears to be a combination of software limitations and a lack of taxpayer awareness. These platforms are designed to simplify tax preparation, but in some cases, they simplify too much—failing to ask the right questions or automatically generate the correct forms. This is especially problematic for taxpayers with more complex financial situations, such as those with multiple sources of income or pass-through entities.
How to Check if You’ve Missed the QBI Deduction
If you have a pass-through entity and used DIY tax software for your tax preparation, it’s crucial to review your tax return to see if Form 8995 or 8995-A was included. These forms are necessary to claim the QBI deduction. Here’s how you can verify:
- Locate the Forms in Your Return: Check your tax return documents for Form 8995 or 8995-A. If these forms are missing, it’s likely that the QBI deduction wasn’t applied to your return.
- Review Your Business Income: Look at the income reported from your business activities. If you had a profit, you should have been eligible for at least some portion of the QBI deduction, assuming your taxable income falls below the phase-out limits.
- Consult a Tax Professional: If you’re unsure whether you qualified for the deduction or how to check your return, it may be time to consult a tax professional. They can review your past returns, identify any missed deductions, and help you file an amendment if necessary.
Amending Your Tax Return
If you discover that you missed the QBI deduction, don’t panic—you can file an amended return to claim it. Amending your tax return is a straightforward process but requires attention to detail:
- Gather Your Documentation: Collect all your business income records, previous tax returns, and any additional information needed to accurately calculate your QBI.
- Complete Form 1040-X: This is the form used to amend your tax return. You’ll also need to include Form 8995 or 8995-A to reflect the QBI deduction.
- File the Amendment: You can file your amended return electronically or by mail, depending on the tax year and your specific situation. Be prepared to wait several weeks or even months for the IRS to process your amendment and issue any refund.
Don’t Let Tax Software Errors Cost You
The QBI deduction is a valuable tax break for business owners, potentially saving you thousands of dollars each year. However, relying solely on tax software without understanding your eligibility and ensuring the correct forms are included can lead to missed opportunities.
If you think you might have missed this deduction, it’s worth taking the time to review your past returns and amend them if necessary. A little effort now can result in substantial tax savings, putting more money back into your business and your pocket.
Final Thoughts
Tax laws can be complex and ever-changing, making it challenging to stay on top of all the deductions and credits available to you. While tax preparation software can be a useful tool, it’s not foolproof, especially for taxpayers with more complicated financial situations.
If you have a pass-through entity and aren’t sure if you’ve claimed the QBI deduction correctly, consider reaching out to a tax professional for a review. They can help you navigate the complexities of the tax code, maximize your deductions, and ensure you’re not leaving money on the table.
