Excess Business Loss Limitation Update

A now permanent tax planning consideration 

When the Tax Cuts and Jobs Act (TCJA) was enacted in late 2017, many business owners benefited from taxpayer favorable amendments to the Internal Revenue Code. However, there were some limitations created as part of the TCJA. One such limitation is the excess business loss (EBL) rule under Internal Revenue Code Section 461(l), which restricts the ability of non-corporate taxpayers to offset business losses against other sources of income, such as wages, interest, dividends and capital gains. Recent legislation has made an important change to this rule: it is now permanent. 

What is an excess business loss? 

An excess business loss occurs when a taxpayer’s total allowable deductions, regardless of whether they may be limited by other tax rules, exceeds the sum of:  

• All your business income and gains for that tax year, plus 
• A set threshold amount determined by the IRS which is adjusted annually for inflation. The 2025 tax year thresholds are $313,000 for non-joint filers and $626,000 for joint filers. 

Any business loss exceeding this amount is classified as an excess business loss. 

Example 

• In 2025, T, a single taxpayer, has gross receipts of $200,000 and deductions of $563,000 from their business. This results in a current year loss of $363,000. Assuming no other business income or loss, T can deduct only $313,000 on his current year form 1040. T’s excess business loss is $50,000 ($200,000 – $563,000 + $313,000). 

• The facts are the same above except that T’s spouse (S) also has two businesses – one with a 2025 loss of $500,000 and another with 2025 income of $200,000, for a net loss of $300,000. T & S combined have business losses of $663,000. Assuming no other business income or loss, they are able to deduct only $626,000 on their current year 1040.  S and T’s excess business loss is $37,000 ($200,000 − $500,000 − $363,000 + $626,000). 

Note: According to this Code Section, you first need to apply the passive activity loss and at-risk limitation rules.  Once you apply those rules, any loss is eligible to be netted with your income. 

What changed recently? 

Under prior law, the excess business loss limitation was scheduled to expire after 2028. The One Big Beautiful Bill Act (OBBBA) has removed that sunset provision, making the limitation permanent for individuals, trusts and estates. As a result, business leaders must now plan with the understanding that this loss cap will remain a long-term feature of their tax planning strategy.  

Tax planning consideration 

Any excess business loss is carried forward to future tax years as a net operating loss (NOL). NOLs may offset taxable income in subsequent years, subject to the current rule that limits their use to 80 percent of taxable income in any given year. Any amount of NOL not used is then carried forward indefinitely to the next tax period until you are able to use it.  

While business losses can still provide meaningful tax benefits over time, the ability to use them in the year incurred is now capped indefinitely. Our team of tax professionals continue to monitor legislative and IRS developments and can help you understand how these rules apply to your specific situation.  

Contact your Opportunity Advisor for questions on this topic or Email | 804.747.0000.   

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