Excess Business Loss Limitation: Now a Permanent Tax Planning Issue
Last summer’s One Big Beautiful Bill Act (OBBBA) contained a number of provisions that businesses can use to generate sizable deductions and reduce their tax burden. These include accelerated depreciation methods such as bonus depreciation and Section 179 expensing, as well as other deductions like research and development expense write-offs.
When planning around such deductions, however, noncorporate business owners should keep in mind another rule—the excess business loss (EBL) limitation—which could significantly affect how and when they benefit from these provisions. Instead of allowing the EBL limitation to sunset as scheduled in 2028, the OBBBA made the limitation permanent for tax years beginning after December 31, 2025. As a result, business owners should adjust their long-term tax and financial planning strategies to take it into account.
How the EBL Rule Works
The EBL limitation rule applies to noncorporate taxpayers such as sole proprietors, partners in partnerships and shareholders of S corporations. It also applies to most LLC owners if their companies are taxed as partnerships or sole proprietorships. For partnerships and S corporations, the limitation is applied at the owner level rather than the entity level.
In general, the EBL limitation puts a cap on the amount of business losses an individual can use to offset other income, such as wages or investment income, in any given year. For tax year 2025, the limitation was $313,000 for single filers and $626,000 for married couples filing jointly. Beginning in 2026, the thresholds reset to $256,000 for single filers and $512,000 for joint filers, indexed annually for inflation.
If the combined losses from all of a taxpayer’s trades or businesses exceed business income by more than the specified limit, any loss above the threshold is considered an excess business loss and cannot be used to offset other income for that year. Instead, the excess amount is carried forward and treated as a net operating loss (NOL), which can offset taxable income in future years. Under current rules, NOL deductions are limited to 80% of the individual’s taxable income in the year they are used, but any remaining balance can continue to be carried forward indefinitely.
Although the EBL rule can limit the immediate tax benefit of large business losses, it does not eliminate them. The losses may ultimately provide the same tax benefit—but that benefit is spread out over multiple years instead of all at once. In other words, the limitation simply changes the timing of deductions but does not reduce the total losses allowed.
An Often-Changing Rule Made Permanent
Although the EBL limitation has been on the books for several years, it can still catch taxpayers off guard. One reason for this is its complicated legislative history.
The rule first went into effect as part of the 2017 Tax Cuts and Jobs Act and was originally scheduled to sunset after 2025. In 2020 it was temporarily suspended, however, to allow taxpayers to claim larger deductions during the COVID-19 pandemic.
Because the rule was suspended for several years, some current business owners may remember claiming large losses a few years ago without encountering the limitation, but that option ended after 2021 when the rule was reinstated.
Later legislation extended the rule’s expiration date several more times until, ultimately, in 2025, the OBBBA removed the sunset provision altogether and made the EBL limitation a permanent part of the tax code.
Planning Strategies That Can Trigger the Rule
Because the EBL limitation affects the timing of deductions, it can influence a wide range of tax strategies. The rule often becomes relevant for startup businesses with heavy first-year losses or in other situations when a business owner plans to intentionally generate large deductions in a single year.
For example, a business may purchase significant amounts of equipment and claim immediate deductions using bonus depreciation or Section 179. Those provisions can create substantial losses, but if the total business loss exceeds the EBL threshold, the taxpayer may not be able to use the entire deduction to offset other income in the current year.
Another example involves research and development expenses. Following the OBBBA, some previously capitalized R&D costs may now be deducted immediately, which can create sizable losses in a single year (for more information, see Restored R&E Expensing: Key Decisions for Tax Year 2025). Taxpayers classified as “Real Estate Professionals” may also encounter the rule when using cost segregation studies or claiming accelerated depreciation to generate large deductions.
Similarly, taxpayers sometimes plan large personal transactions, such as a Roth conversion, expecting to offset the personal income they must report by claiming a sizable business loss. Because of the EBL limitation, some of that loss could be disallowed for the current year and would instead need to be carried forward as an NOL.
Now that the EBL limitation is a permanent feature of the tax code, it is likely to remain an important factor in pass-through owners’ tax planning for years to come. Noncorporate business owners who are considering strategies that could generate significant deductions should consult with their tax advisors in advance to determine whether the excess business loss limitation might affect the timing of their expected tax benefits.
Please contact us to discuss excess business losses or any other tax planning questions.
