18.2 Calculating Net Profit/Loss
Key Takeaways
Net profit = Gross receipts - COGS - Business expenses.
QBI deduction (§199A) allows 20% deduction of qualified business income.
OBBBA made the QBI deduction PERMANENT (no longer scheduled to sunset).
Tax Year 2025 QBI thresholds: $197,300 (Single) / $394,600 (MFJ).
2025 phase-in range: $50K Single / $100K MFJ (expands to $75K/$150K in 2026).
EBL limits for Tax Year 2025: $313,000 (Single) / $626,000 (MFJ) — made permanent by OBBBA.
Why This Matters for the Exam
Net profit calculation is fundamental. The exam tests COGS, the QBI deduction, and loss limitations.
The Net Profit Formula
| Step | Calculation |
|---|---|
| Gross Receipts | All business income |
| - COGS | Beginning inventory + Purchases - Ending inventory |
| = Gross Profit | |
| - Business Expenses | Ordinary and necessary |
| = Net Profit | Line 31, Schedule C |
Cost of Goods Sold (COGS)
| Element | Description |
|---|---|
| Beginning inventory | Start of year |
| + Purchases | Goods acquired |
| - Ending inventory | End of year |
| = COGS | Cost of items sold |
Small Business Exception: Under $31M gross receipts (2025) can treat inventory as non-incidental materials and use cash method.
Qualified Business Income (QBI) Deduction (§199A)
The QBI deduction is one of the most powerful tax breaks for sole proprietors. OBBBA made it permanent — it was previously scheduled to sunset after 2025.
| Element | Tax Year 2025 |
|---|---|
| Deduction rate | 20% of QBI |
| Status | Permanent (OBBBA) |
| Single threshold | $197,300 |
| MFJ threshold | $394,600 |
| Phase-in range (2025) | $50,000 Single / $100,000 MFJ |
| Phase-in range (2026+) | Expands to $75,000 / $150,000 |
QBI Defined
| Included in QBI | Not Included |
|---|---|
| Net trade/business income | Capital gains/losses |
| Rental income (if trade/business) | Dividends |
| Schedule C net profit | Investment interest |
| Guaranteed payments | |
| W-2 wages | |
| Reasonable comp to S corp owner |
QBI Deduction Calculation
| Taxable Income | Calculation |
|---|---|
| Below threshold | 20% of QBI (simple) |
| In phase-in range | W-2 wage/UBIA limits phase in |
| Above upper threshold (non-SSTB) | Full W-2 wage/UBIA test |
| SSTB above upper threshold | Deduction fully eliminated |
W-2 Wage Limitation (Above Threshold)
For taxpayers above threshold, QBI deduction is limited to the greater of:
| Test | Calculation |
|---|---|
| 50% W-2 wages | 50% × W-2 wages paid |
| 25%/2.5% test | 25% of W-2 wages + 2.5% of UBIA |
Looking Ahead: 2026 OBBBA Changes (Not for 2025 Exam)
For tax years beginning in 2026:
- Phase-in range expands from $50K/$100K to $75K/$150K.
- New $400 minimum QBI deduction if QBI ≥ $1,000 (encourages small sole proprietors).
These 2026 changes are NOT tested for the 2026-2027 cycle (which covers TY 2025).
Business Losses
| Rule | Description |
|---|---|
| General | Can offset other income (W-2, etc.) |
| Not like capital losses | No $3,000 limit |
| EBL limitation | Excess Business Loss rules |
Excess Business Loss (EBL) Limitation
OBBBA made §461(l) permanent. For Tax Year 2025:
| Filing Status | EBL Limit |
|---|---|
| Single | $313,000 |
| MFJ | $626,000 |
| Excess | Carried forward as NOL |
Net Profit Example
| Item | Amount |
|---|---|
| Gross Receipts | $100,000 |
| COGS | ($40,000) |
| Gross Profit | $60,000 |
| Business Expenses | ($20,000) |
| Net Profit | $40,000 |
| QBI Deduction (20%) | ($8,000) |
Real-World Scenario
Scenario: Single sole proprietor has $150,000 net profit in 2025. Taxable income is $140,000. No employees.
- QBI: $150,000 (net profit).
- Below threshold: $140,000 < $197,300 → no wage limitation.
- QBI deduction: $150,000 × 20% = $30,000, but limited to 20% of (taxable income - net capital gain) = $28,000.
- Final QBI deduction: $28,000.
On the Exam
Question types to practice on net profit/QBI:
- Calculation Questions: "What is net profit with these numbers?"
- QBI Questions: "What is the QBI deduction for this taxpayer?"
- Threshold Questions: "What are the 2025 QBI thresholds?"
- EBL Questions: "What happens to losses exceeding the EBL limit?"
The key is to remember: Net profit = Gross receipts - COGS - Expenses. QBI = 20% deduction (permanent post-OBBBA). 2025 thresholds: $197,300/$394,600. 2025 EBL limits: $313,000/$626,000 (permanent).
Sole proprietor: $100k receipts, $40k COGS, $20k expenses. Net profit?
$100,000
$60,000
$40,000
$80,000
What is TRUE about the QBI deduction for Tax Year 2025?
Has expired
Permanent at 20% of QBI (OBBBA made it permanent)
Only for C corps
Limited to $3,000/year
Single taxpayer: $50k QBI, $45k taxable income. QBI deduction?
$10,000
$9,000
$12,000
$2,500
Sections you finish are checked off in the contents.