QBI, Credits, NOLs and Accounting Methods

The section 199A deduction above the threshold, general business credits, research expenditures after the One Big Beautiful Bill Act, excess business losses and NOLs, accounting methods and Form 3115, book-tax reconciliation on Schedules M-1 and M-2, related-party timing rules and choice-of-entity planning. The SEE pairs recall of 2025 thresholds with one or two worked limits.

Business Tax Preparation4 min read7 sections

Must-know for the exam

Above the 2025 QBI phase-in ($247,300 single, $494,600 MFJ), SSTB income is not QBI and the deduction is capped by wage and UBIA limits (IRC 199A; Rev. Proc. 2024-40 sec. 3.27).
The wage limit is the greater of 50% of W-2 wages or 25% of W-2 wages plus 2.5% of UBIA (IRC 199A(b)(2); Form 8995-A instructions (2025)).
SSTBs include health, law, accounting, consulting, athletics and financial services; engineering and architecture are excluded (IRC 199A(d)(2); Treas. Reg. 1.199A-5(b)).
Negative combined QBI carries forward as a qualified business loss that reduces next year's QBI (IRC 199A(c)(2); Form 8995 instructions (2025)).
The 2025 excess business loss threshold is $313,000 ($626,000 MFJ); the disallowed loss becomes an NOL carryforward (IRC 461(l); Rev. Proc. 2024-40 sec. 3.32).
Domestic research expenditures in years beginning after 2024 may be deducted currently or amortized over 60 months by election; foreign research stays at 15 years (IRC 174A, 174).
Unused general business credits carry back 1 year and forward 20 years (IRC 39(a); Form 3800 instructions (2025)).
Changing an accounting method needs IRS consent on Form 3115; a positive 481(a) adjustment is generally spread over 4 years (IRC 446(e), 481; Rev. Proc. 2015-13).
Accrual deductions need the all events test and economic performance (IRC 461(h); Treas. Reg. 1.461-1(a)(2)).
An accrual payer deducts amounts owed to a related cash-method payee, such as a more-than-50% shareholder, only when the payee includes them (IRC 267(a)(2)).

On this page · 7 sections

Traps that cost marks

Still requiring 5-year amortization of domestic research costs for 2025.
Treating the disallowed amount as permanently lost.
Using NOL carryover periods for credits.
Switching methods without filing Form 3115.
Spreading negative adjustments too, or taking positive ones at once.
Deducting accrued liabilities before economic performance.
Applying the 2½-month rule to payments to a controlling shareholder.
Adding back items that reduce taxable income.

Why it matters on the exam

This topic gathers the rules that sit on top of a business's ordinary income computation: the QBI deduction at higher incomes, credits and their carryovers, loss limits, and the timing rules of accounting methods. Questions are short, but each turns on a precise threshold or ordering rule.

Below the 2025 threshold ($197,300 single, $394,600 MFJ) the QBI deduction is simply 20% of QBI subject to the taxable income cap; see the Part 1 note on itemized deductions and QBI.

QBI above the threshold

Taxable income above $494,600 MFJ? — Full limits apply; between $394,600 and $494,600 they phase in.
SSTB? — Above the range, SSTB income is excluded entirely.
Tentative deduction — 20% of QBI for each business.
Wage and UBIA cap — Greater of 50% of W-2 wages or 25% of wages plus 2.5% of UBIA.
Overall cap — 20% of taxable income less net capital gain.

IRC 199A(b), (d), (e); Form 8995-A instructions (2025).

Example: joint taxable income $600,000; a manufacturer with QBI $400,000, W-2 wages $100,000 and UBIA $200,000. 20% of QBI is $80,000; the cap is the greater of $50,000 or $30,000; the deduction is $50,000.

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Business Tax Preparation