TurboTax showing error on Form 8995 - anyone else having this issue?

Thanks for the detailed explanation. Quick question - how would I know if my business is classified as an SSTB? I run a consulting firm, if that matters. Also, does the W-2 wage limitation apply if I only took distributions and no actual salary from my S-corp this year?

Consulting firms are typically classified as SSTBs, which could explain why your QBI deduction is being limited. The IRS defines SSTBs as businesses where the principal asset is the reputation or skill of one or more employees or owners, including fields like consulting, health, law, accounting, and financial services. The W-2 wage limitation absolutely applies even if you only took distributions. This is actually a red flag - the IRS requires S-corp owners who provide services to take a "reasonable salary" as W-2 wages before taking distributions. If you didn't pay yourself any salary, that's a compliance issue that could trigger an audit. The QBI deduction limits are based on either 50% of W-2 wages paid or 25% of W-2 wages plus 2.5% of qualified property.

Does taxr.ai actually fix the errors in your tax software or just point them out? I'm having a similar issue but with a partnership K-1 instead of an S-corp.

I'm skeptical about these AI tax tools. How does it handle complicated situations like rental properties with QBI or multiple businesses with different SSTB classifications? My accountant says these edge cases are where most software fails.

It doesn't actually change your tax software, but it analyzes your documents and tells you exactly what's wrong and how to fix it. For your partnership K-1, it would identify if the QBI calculation is incorrect and show you the right numbers to enter manually. For complex situations with multiple businesses or rental properties, it actually excels because it can analyze all your documentation together. It's designed to catch the edge cases that standard software misses - it found three specific issues in my return involving QBI from multiple sources that my accountant had overlooked the previous year.

Wait, how does this actually work? Does it just give you a better phone number to call or something? The IRS phone system is literally the worst thing I've ever experienced.

Yeah right. There's no way this actually gets you through to the IRS faster. I've been trying for 3 weeks to talk to someone about my business tax issue. If this worked, everyone would be using it and the IRS would just shut it down.

It doesn't give you a different number - it navigates the regular IRS phone system for you and holds your place in line. When an agent picks up, it calls your phone and connects you directly. It's basically like having someone else sit on hold for you. The reason it works is because they use a system that constantly redials and navigates the phone tree until it gets through. It's completely legitimate - you're still calling the regular IRS number, just with technology handling the frustrating waiting and menu navigation part. I was skeptical too, but after wasting hours on hold myself, it was worth trying. I got through in 17 minutes when I had previously spent over 3 hours getting disconnected.

That's a great point about capital gains. I did sell some stock this year with about $45k in long-term capital gains. Could that be affecting my QBI calculation? The software doesn't seem to be explaining any limitations - it just shows an incomplete calculation.

Yes, those capital gains are almost certainly affecting your QBI deduction. Here's why: your QBI deduction is limited to the LESSER of 20% of your qualified business income OR 20% of your taxable income minus net capital gains. With $45k in capital gains, your second limitation (taxable income minus capital gains) is lower, which reduces your available QBI deduction. The software is probably calculating this correctly but failing to show you the detailed limitation steps. This is actually one of the most commonly overlooked aspects of the QBI deduction. If you expand the Form 8995 in your software, look at Line 11 where it should show this alternative limitation calculation. That's likely where the apparent "error" is happening - it's not an error but a limitation that's poorly explained in the interface.

I switched from TurboTax to H&R Block this year specifically because of Form 8995 issues. H&R Block's interface shows the calculation steps more clearly and let me see exactly why my deduction was being limited. TurboTax was just giving me a final number with no explanation.

Thanks for the suggestion. I'll try H&R Block and see if it handles my situation better. Did you need to re-enter everything or were you able to import your data from TurboTax?

@c9b46ddd6b4b This is exactly the guidance I needed! I just checked and you're right - my software generated Form 8995-A instead of the simple 8995, but it wasn't showing me the detailed calculations clearly. I'm definitely in SSTB territory with my consulting business, and my income is right at that phase-out threshold. The "incomplete" calculation I was seeing was actually the software applying the phase-out correctly but not explaining it well. Quick follow-up question - you mentioned the reasonable salary requirement. I've been taking only distributions this year to avoid payroll taxes, but now I'm realizing this might be creating problems beyond just the QBI calculation. What's considered "reasonable" for a consulting business? Should I be looking at comparable salaries in my industry, or is there a simpler rule of thumb the IRS uses?

@c9b46ddd6b4b @7ca11bd5e86e The reasonable salary issue is huge and you're right to be concerned about it! The IRS doesn't give a specific percentage, but they expect you to pay yourself what you'd pay someone else to do your job. For consulting, this typically means looking at market rates for similar roles in your area. A common rule of thumb is 60-70% of net business income as salary, but it really depends on your specific situation. The IRS looks at factors like your role in the business, time devoted, duties performed, and what similar businesses pay for comparable services. Taking only distributions is a red flag that could trigger an audit. Even worse, inadequate W-2 wages will hurt your QBI deduction because the wage limitation (50% of W-2 wages or 25% of wages plus 2.5% of qualified property) becomes a bigger constraint. I'd strongly recommend consulting with a CPA who specializes in S-corps to determine the right salary level. The payroll tax savings from taking distributions aren't worth the audit risk and potential QBI deduction limitations.

@7ca11bd5e86e The "reasonable salary" issue is actually a big compliance risk that many S-corp owners overlook! The IRS doesn't have a specific percentage, but they generally expect you to pay yourself what you'd pay someone else to do your job. For consulting businesses, this often means looking at comparable salaries in your field and geographic area. A common rule of thumb is 60-70% of your net business income should go to salary if you're the primary service provider, but this varies widely based on your specific situation. The key factors the IRS considers are: the nature and extent of your services, your qualifications and experience, what comparable businesses pay for similar services, and the amount of time you devote to the business. Taking only distributions is a red flag that could trigger an audit. Even worse, it can completely mess up your QBI calculation because the deduction limits are based on W-2 wages paid by the business. With no salary, you might lose a significant portion of your QBI deduction even if you're not subject to the SSTB limitations. I'd strongly recommend consulting with a tax professional to determine an appropriate salary for your situation - the payroll tax savings from taking distributions usually aren't worth the audit risk and potential QBI deduction loss.

@7ca11bd5e86e The IRS doesn't have a specific percentage rule, but they do expect "reasonable compensation" that's comparable to what you'd pay an unrelated person for the same services. For consulting businesses, this typically means looking at industry salary surveys for similar roles in your geographic area. A common rule of thumb is that your W-2 salary should be at least 40-60% of your net business income, but the IRS really focuses on market rates. If you're a senior consultant in a major metro area, you might need to pay yourself $80-120k in salary even if your business generates $200k+. The catch-22 is that taking more salary increases your payroll taxes but potentially improves your QBI deduction calculation since the W-2 wage limitation becomes less restrictive. However, since you're likely in SSTB phase-out territory anyway, the wage limitation might not matter much for your specific situation. I'd recommend running the numbers both ways - higher salary vs. more distributions - to see which gives you better overall tax results when you factor in both payroll taxes and QBI limitations.

@7ca11bd5e86e The reasonable salary requirement is a big deal that could affect both your QBI deduction and expose you to IRS scrutiny. For S-corp owners who provide services, the IRS expects compensation comparable to what you'd pay an employee doing similar work. For consulting businesses, a good rule of thumb is 60-70% of net business income should go to salary, with the remainder as distributions. So with $192k in business profit, you'd want to be paying yourself roughly $115k-$135k in W-2 wages. The IRS looks at factors like your role in the business, time spent, and industry compensation standards. Taking only distributions is a red flag that could trigger an audit. Beyond the compliance risk, it's also limiting your QBI deduction because the W-2 wage limitation (50% of wages paid) is probably constraining your calculation. You might actually end up with a better overall tax situation by taking reasonable salary, even with the payroll taxes. I'd strongly recommend consulting with a tax professional about unwinding this for 2024 - you can still run payroll before year-end and it might improve both your compliance position and your QBI deduction.

@7ca11bd5e86e The "reasonable salary" requirement is one of the most scrutinized areas for S-corp owners. The IRS doesn't give a specific percentage, but they expect you to pay yourself what you would pay an employee doing the same work. For consulting businesses, I typically see successful defenses in the $60k-$120k range depending on the type of consulting and geographic area. Taking only distributions is a red flag that could trigger an audit. The IRS has been cracking down on this because they lose out on FICA taxes when S-corp owners try to minimize W-2 wages. Even worse, having zero W-2 wages completely eliminates your QBI deduction if you're above the income thresholds since the deduction is limited by W-2 wages paid. I'd recommend looking up salary data for similar roles in your area on sites like PayScale or Salary.com, then using that as justification for your reasonable salary. You might want to do a payroll adjustment before year-end if possible - it's much easier to fix now than to defend it during an audit later.

@7ca11bd5e86e The IRS doesn't have a specific percentage rule for S-corp owner salaries, but they expect it to be comparable to what you'd pay someone else to do the same work. For consulting businesses, I typically see 40-60% of net business income taken as salary, depending on the type of consulting and local market rates. The key is documentation - if the IRS audits, they'll want to see that you researched comparable salaries in your area and industry. Sites like PayScale, Glassdoor, or Bureau of Labor Statistics can help justify your salary level. Taking only distributions is a red flag that could trigger an audit. Not only does it hurt your QBI calculation (since the wage limitation is based on actual W-2 wages), but it also saves you from paying the employer portion of Social Security and Medicare taxes, which the IRS views as tax avoidance if the salary is unreasonably low. I'd recommend running payroll for at least the remaining months of this tax year and adjusting your estimated payments accordingly. You can still take some distributions, but having a documented reasonable salary protects both your QBI deduction and your compliance status.

@7ca11bd5e86e For reasonable salary in consulting, the IRS looks at what you'd pay someone else to do the same work. Generally, this means looking at comparable salaries for consultants in your field and geographic area. A common rule of thumb is 60-70% of net business income should go to reasonable salary, with the remainder as distributions. So with $192k in profit, you'd typically want to pay yourself around $115k-135k in W-2 wages. The IRS has been cracking down on S-corp owners who take minimal salaries just to avoid payroll taxes. For the QBI calculation, having proper W-2 wages actually helps because it provides the wage base needed for the 50% wage limitation test. Without adequate W-2 wages, your QBI deduction gets limited even further. You might want to run payroll for the remaining months this year to establish some wage base - you can still take distributions on top of salary. Also consider that while you save on payroll taxes with distributions, you lose out on Social Security credits and potentially retirement plan contributions that are based on earned income.

@7ca11bd5e86e The "reasonable salary" issue is huge and you're right to be concerned! Taking only distributions while providing services to your S-corp is a red flag that could trigger an audit. The IRS doesn't have a specific percentage rule, but they expect you to pay yourself what you'd pay someone else to do your job. For consulting businesses, I've seen the IRS successfully argue for salaries anywhere from 40-60% of net business income, depending on the complexity of services provided. If you're the primary revenue generator, they'll expect a higher percentage. Industry salary surveys and comparable positions are definitely what they look at. The tricky part is this creates a catch-22 with QBI - you need W-2 wages to maximize your QBI deduction in many cases, but the more you take as salary (vs distributions), the more you pay in payroll taxes. A good rule of thumb I've heard from CPAs is to pay yourself at least what a comparable employee would make, then take additional profits as distributions. This balances audit risk with tax efficiency. You might want to consider doing a late payroll run to establish some W-2 wages for this year if possible, especially since it could actually help your QBI calculation if you're not fully phased out of the SSTB limitations.

@7ca11bd5e86e The "reasonable salary" question is huge for S-corp owners and directly impacts your QBI calculation. The IRS doesn't have a specific percentage, but they generally expect you to pay yourself what you'd pay someone else to do your job. For consulting, this usually means looking at industry salary data for similar roles in your geographic area. A common rule of thumb is 60-70% of business profits as salary, but it really depends on your specific situation. If you're a specialized consultant earning $300k+, your reasonable salary might be $120-150k. The key is being able to justify it based on comparable positions. The payroll tax savings from taking distributions instead of salary can backfire in multiple ways: 1) It reduces your QBI deduction since the wage limitation is based on actual W-2 wages, 2) It can trigger an IRS audit if they think your salary is unreasonably low, and 3) It reduces your Social Security benefits since those are based on wage history. I'd strongly recommend consulting with a CPA who specializes in S-corps to determine the right salary level for your situation. The tax savings from avoiding payroll taxes are often less than the QBI deduction you lose, plus you're taking on audit risk.