The IRS has issued a draft of the instructions[1] for Form 8995, Qualified Business Income Deduction Simplified Computation, for 2020, something that may not initially seem noteworthy. But it turns out that what is no longer found in the instructions may indicate an IRS change of view on the impact of charitable contributions on the calculation of qualified business income under IRC §199A.

Eric Yauch noted in an article published in Tax Notes Today Federal on October 14, 2020[2] that the revised instructions no longer contain a reference to, in at least some cases, reducing qualified business income (QBI) by charitable contributions.

The 2019 Form 8995 instructions provided, in part:

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.[3] (emphasis added)

In the 2020 draft PDF of the instructions, the last sentence of that paragraph now reads:

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.[4]

Note that the reference to charitable contributions is now absent from this sentence.

As the Tax Notes Today Federal article notes in quotes from a number of tax professionals, many had been surprised when the reference to charitable contributions being used in computing QBI cropped up in various 2019 IRS instructions and had questioned whether, in fact, the implied position of the IRS could be supported under the law.

[1] Draft 2020 Form 8895 Instructions, October 9, 2020, IRS website, https://www.irs.gov/pub/irs-dft/i8995--dft.pdf (retrieved October 14, 2020)

[2] Eric Yauch, “Practitioners Rejoice at Subtle IRS Change on 199A Calculation,” Tax Notes Today Federal, October 13, 2020, https://www.taxnotes.com/tax-notes-today-federal/exemptions-and-deductions/practitioners-rejoice-subtle-irs-change-199a-calculation/2020/10/14/2d26d (retrieved October 14, 2020, subscription required)

[3] 2019 Form 8995 Instructions, IRS website, https://www.irs.gov/instructions/i8995 (retrieved October 14, 2020)

[4] Draft 2020 Form 8895 Instructions, October 9, 2020, p. 2