A self-employed architect earns $300,000 of qualified business income, pays $80,000 in W-2 wages, and assumes she gets the full 20% qualified business income (QBI) deduction. Above the threshold, the W-2 wage cap drops her deduction from $60,000 to $40,000. Miss the wage test and you miss $20,000.
A trade or business may deduct ordinary and necessary taxes paid or accrued in carrying on the activity.
- State and local income taxes: an individual pays at the personal level on Schedule A subject to the $40,000 state and local tax (SALT) cap; a partnership or S corp...
- Real property taxes on business real estate: deductible as paid (cash) or accrued (accrual); apportion at sale between buyer and seller.
- Personal property taxes on business equipment: deductible only if ad valorem (based on value); flat registration fees are not.
- Employer payroll taxes: employer share of Federal Insurance Contributions Act (FICA), Federal Unemployment Tax Act (FUTA), and state unemployment, fully deductible.
- Federal excise taxes: deductible if business-related (fuel excise, heavy highway use, environmental).
Common mistakes
- Treating federal income tax as deductible. Federal income tax is never deductible. State and local income tax allocable to a sole proprietor's business flows to the owner's Schedule A subject to the $40,000 SALT cap, not Schedule C.
- Expensing sales tax on a depreciable asset. Sales tax paid on the purchase of business equipment is capitalized into basis, not separately deducted as "Taxes and licenses."
- Applying the personal casualty floors to business losses. The $100-per-event and 10% AGI floors apply only to personal casualty losses. Business casualties are deductible from dollar one with no federally declared disaster requirement.
Bottom line
- Deductible business taxes: state/local income, real estate, personal property, employer payroll, federal excise. Never deductible: federal income tax, fines/penalties, sales tax on assets (capitalize into basis), local benefit assessments.
- Employer FICA: 6.2% Social Security up to $176,100 (2025) plus 1.45% Medicare on all wages, matched dollar for dollar by the employee.
- Business casualty losses (§165) escape the federally declared disaster restriction and the $100 / 10% AGI floors that limit personal casualty losses through 2025; deductible from dollar one.
- Business loss measurement: partial destructions use lesser of basis or FMV decline; complete destructions use adjusted basis with no FMV cap.
Exam shortcut
QBI thresholds collapse to one number: 2025 single starts at $197,300 and MFJ is exactly 2x ($394,600). Phase-in range is $50,000 single / $100,000 MFJ. Add the range to the start to get the ceiling. Credit carry vs NOL carry: general business credit carries back 1 year and forward 20 years; post-2017 NOLs carry forward only (indefinite) except farming NOLs (2-year carryback).
The full lesson (about 3,850 words, 26 min read) adds 2 worked examples, all 7 common mistakes, a self-check, free in the app.
Learning objectives
- 2
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