Business Deductions, NOLs & Credits (2025)
General Business Deduction Rules — §162
Deductible if ordinary AND necessary for the trade or business. Must be reasonable in amount. Personal expenses not deductible; mixed-use expenses allocated by business-use percentage.
Start-Up Costs — §195
- $5,000 immediate deduction (phased out dollar-for-dollar when costs >$50,000; $0 at $55,000+)
- Remaining amortized over 180 months (15 years) from month business begins operations
- Must be costs that would be deductible if incurred by existing business
- Includes: market analysis, licenses, pre-opening advertising, employee training, travel for distributors, executive/consultant salaries
Organizational Costs — §248 (Corp) / §709 (Partnership)
- Same treatment: $5,000 immediate (phased out >$50,000), rest amortized 180 months
- Includes: legal/accounting fees for formation, state filing fees, partnership agreement costs
Failed Business / Start-Up
- Costs before deciding to pursue specific business = personal expenses (not deductible)
- Costs for genuine attempt to buy/start specific business = capital costs (Schedule D capital loss, max $3,000/year against ordinary income)
- Corporation: can deduct all investigation costs as business loss (different from individual)
Specific Business Expenses
| Expense | Deductibility |
|---|---|
| Business interest | Deductible subject to §163(j) limit (30% of ATI) |
| State/local income taxes | C-corp/partnership: fully deductible. Sole prop on Sch C: SALT limited on Schedule A ($40K MFJ/$20K MFS, 2025 OBBBA) |
| PTET (pass-through entity tax) | Entity deducts full amount (not subject to individual SALT cap) |
| Bad debts (business) | Specific charge-off method; business bad debts = ordinary loss. Cash-basis: no bad debt deduction (never reported income) |
| Bad debts (non-business) | Short-term capital loss |
| Insurance premiums | Business insurance = deductible; life insurance (if business is beneficiary) = NOT deductible |
| Self-employed health insurance | 100% deductible above-the-line (Form 7206 → Schedule 1). Limited by net profit. Cannot deduct if eligible for employer-subsidized plan any month |
| Rent | Deductible as paid/accrued. Prepaid rent: only current portion. Cost to acquire lease = amortize over lease term |
| Repairs/maintenance | Deductible in year paid (vs. improvements = capitalized) |
| Travel (business) | Transportation 100% deductible; meals 50% deductible. Must be away from tax home overnight for business. Receipts required for ≥$75 (except lodging) |
| Per diem | Employer can use federal per diem rates instead of actual costs. Self-employed: per diem for meals only. 60-day safe harbor for expense reports |
| Transportation | Standard mileage: 70¢/mile (2025). Actual expenses alternative. Commuting NOT deductible (unless home office qualifies as principal place of business) |
| Entertainment | Generally NOT deductible (TCJA). Exceptions: entertainment business (nightclub hiring performers = 100%), company-wide events (team building, holiday party, picnic = 100% if non-discriminatory) |
| Business meals | 50% deductible (2025). OBBBA: certain business meals increase to 100% for tax years beginning after Dec 31, 2025 (2026+) |
| Business gifts | $25/person/year. Packaging, engraving, insurance, mailing NOT included in limit. Promotional items ≤$4 with business name = NOT subject to $25 limit |
| Charitable contributions | Only C-corps deduct on business return: 10% of taxable income (2025). Sole props/partnerships/S-corps: separately stated, deducted on Schedule A. OBBBA (2026): 1% floor before 10% limit applies |
| Lobbying/political | NOT deductible |
| Fines/penalties | NOT deductible (government fines) |
| Club dues | NOT deductible (country clubs, golf, athletic, hotel/airline clubs) |
| Moving expenses | NOT deductible (TCJA; except active-duty military) |
Home Office Deduction
- Regular and exclusive use for business + one of: principal place of business, meeting clients/patients, or separate structure
- Regular method (Form 8829): business-use percentage × home expenses (rent, utilities, insurance, depreciation). Cannot create business loss
- Simplified method: $5/sq ft up to 300 sq ft (max $1,500). No separate depreciation. Can still deduct mortgage interest/property taxes on Schedule A
- Unused home office deductions carry forward
Business Interest Limitation — §163(j)
Deductible business interest limited to:
- Business interest income + 30% of adjusted taxable income (ATI) + floor plan financing interest
- Small business exception: average gross receipts ≤$31M (3-year test) for 2025
- OBBBA (tax years beginning after December 31, 2024): depreciation, amortization, and depletion are again added back when computing ATI, restoring an EBITDA-style calculation and generally increasing ATI and deductible interest
- Disallowed interest carries forward indefinitely
- Exceptions: certain real estate trades (election), farming businesses (election), regulated public utilities
Net Operating Losses (NOLs) — Business
- Post-2020 NOLs: NO carryback, indefinite carryforward
- 80% of taxable income limit (computed before NOL deduction and §199A deduction)
- Pre-2018 NOLs: not subject to 80% limit
- Farm NOL: 2-year carryback (can elect to waive); property/casualty insurance companies: 2-year carryback, 20-year carryforward (no 80% limit)
- Forms: Form 1045 (individuals, expedited refund) or Form 1040-X; Form 1139 (corporations, quick refund) — must file by Dec 31 of year following NOL year
- Partnerships/S-corps: don't generate NOL at entity level; losses pass through to owners
Excess Business Loss Limitation — §461(l)
For non-corporate taxpayers: business losses limited to $313,000 ($626,000 MFJ, 2025). Computed on Form 461. Excess = NOL carryforward (subject to 80% limit in subsequent year). Wages are NOT business income for this limit. OBBBA: limitation made permanent with different base amounts starting 2026, but 2025 thresholds remain $313,000/$626,000.
§199A Qualified Business Income Deduction
Available to sole props, partners, S-corp shareholders, estates/trusts. 20% of QBI + 20% of qualified REIT dividends and PTP income. Below-the-line deduction (reduces taxable income, not AGI). C-corp income does NOT qualify.
2025 Thresholds
- MFJ: $394,600 – $494,600 (phaseout range)
- All other: $197,300 – $247,300 (phaseout range)
- Below threshold: full 20% deduction, no wage/property limit, SSTBs qualify
- Above phaseout: SSTB → NO deduction; non-SSTB → subject to wage/property limitation
QBI Definition
Includes: income, gains, deductions, losses from qualified US trades/businesses. Does NOT include: W-2 wages, capital gains, improperly allocated interest, certain dividends, hobby income, tax-exempt income, rental income (unless trade/business), guaranteed payments, S-corp reasonable compensation, partner non-partner service payments, C-corp income, qualified tip amounts (OBBBA).
SSTB (Specified Service Trade or Business)
Health, law, accounting, actuarial science, performing arts, consulting, athletics, financial services, brokerage services, investing/investment management, trading, dealing in securities, "reputation or skill" services. Excludes: architecture and engineering.
De minimis exception:
- Gross receipts ≤$25M AND SSTB services <10% of total → NOT an SSTB
- Gross receipts >$25M AND SSTB services <5% of total → NOT an SSTB
Wage and Property Limitation (above phaseout, non-SSTB)
QBI deduction limited to greater of:
- 50% of W-2 wages paid by business, OR
- 25% of W-2 wages + 2.5% of UBIA (unadjusted basis immediately after acquisition) of qualified property
Qualified property: depreciable tangible property, held by business at year-end, regular depreciation life not ended, or placed in service ≤10 years. Land and intangibles excluded. REIT/PTP portion NOT subject to this limit.
Rental Safe Harbor
Rental real estate = trade/business for QBI if: separate books/records, ≥250 hours of rental services/year (by owner/employees/contractors) in 3 of 5 consecutive years, contemporaneous records. Does NOT apply to triple-net (NNN) leases or personal-use properties.
OBBBA Impact
QBI deduction made permanent; expanded phase-in starting 2026. 2025 still uses regular §199A rules. Form 8995 (simplified) or Form 8995-A (full).
General Business Credit (GBC) — §38
Umbrella for multiple credits. Filed on individual forms, then aggregated on Form 3800. Non-refundable, cannot offset employment taxes. Order of use: carryforwards (earliest first) → current year credits → carrybacks.
Carryback 1 year, carryforward 20 years. FIFO ordering.
Key Business Credits
| Credit | Key Rules |
|---|---|
| Research Credit (§41) | 20% of qualified research expenses above base amount (regular method) OR alternative simplified credit (ASC). 100% of own research costs; 65% of contracted research. US-only research. Form 6765. Small business can offset up to $500,000 against payroll tax (2025) |
| Work Opportunity Credit (WOTC) | For hiring targeted groups (veterans, ex-felons, TANF recipients, SNAP recipients, SSI, long-term unemployment, etc.). Form 8850 must be filed on/before job offer date. Only for employees starting work on/before Dec 31, 2025 (current law expires after 2025) |
| Disabled Access Credit | 50% of eligible expenditures >$250 up to $10,250 (max credit $5,000). For businesses with gross receipts ≤$1M or ≤30 FTE employees. Form 8826 |
| FICA Tip Credit | Employer credit for FICA paid on tips above federal minimum wage ($5.15/hr for credit calc). Expanded (2025) to include beauty/personal care businesses. Form 8846. OBBBA qualified tip deduction does NOT reduce this credit |
| FMLA Credit | Paid family/medical leave credit. 12.5% (if 50% pay) to 25% (if 100% pay) of wages. Employees must be employed ≥1 year, prior-year comp ≤$93,000 (2025). Form 8994. OBBBA made permanent |
| Small Employer Health Insurance | Up to 50% of premiums (35% tax-exempt). <25 FTE, avg wages <$66,600 (2025), pay ≥50% of premiums, use SHOP marketplace. Phases out at 25 FTE or $66,600 avg wages. Form 8941. Max 2 consecutive years |
| Employer Child Care | 25% of qualified child care facility expenses + 10% of resource/referral costs. Max $150,000/year. Form 8882 |
| Pension Plan Startup (SECURE 2.0) | 100% of startup costs for ≤50 employees (50% for 51-100). Max $5,000/year for 3 years. Plus employer contribution sub-credit: $1,000/employee/year for 5 years. Min $500. Form 8881 |
| Foreign Tax Credit (Corp) | Form 1118. Income/war profits/excess profits taxes, or taxes in lieu of income tax. No credit for VAT/sales tax. Split into passive/active categories. Carryback 1 year, carryforward 10 years. OBBBA: no credit for 10% foreign tax related to GILTI (post-June 28, 2025) |
OBBBA Changes (2025)
- 100% Bonus Depreciation: Restored for qualified property acquired after Jan 19, 2025 under the written-binding-contract rule, subject to the normal placed-in-service requirement (generally 40% for property acquired earlier). See depreciation page.
- Qualified Production Property (QPP): Separate 100% special depreciation for qualified manufacturing/refining facilities. Construction must begin after Jan 19, 2025 and before Jan 1, 2029; placed in service after Jul 4, 2025 and before Jan 1, 2031.
- R&D Expensing (§174A): Domestic R&E expenses currently deductible for tax years beginning after Dec 31, 2024. Foreign R&E still amortized over 15 years.
- Excess Business Loss: Made permanent (different base amounts starting 2026)
- QBI Deduction: Made permanent; expanded phase-in starting 2026
- Business Interest (ATI): Depreciation, amortization, and depletion are again added back for tax years beginning after Dec 31, 2024
- Energy Credits: Many terminated or modified (commercial clean vehicles terminated after Sep 30, 2025; §179D after Jun 30, 2026; clean electricity credits after Dec 31, 2027)