In a financial world full of shifting tax rules and regulations, keeping up with what affects your bottom line isn’t just helpful—it’s essential. One tax rule that continues to play a pivotal role for business owners, entrepreneurs, and investors alike is the Excess Business Loss (EBL) limitation. Extended through 2028 under the American Rescue Plan Act and adjusted annually for inflation, this provision directly impacts how much of your business loss you can deduct in a given tax year.
Let’s break down the mechanics of EBLs, why they matter, and how strategic planning can help you work with—not against—this often-overlooked tax rule.
What Is an Excess Business Loss?
An Excess Business Loss occurs when your total deductions from all business activities exceed your total business income and gains by more than a specified threshold amount. These limits are not fixed; they adjust each year based on inflation.
For the 2025 tax year, the IRS has set the EBL thresholds at:
- $313,000 for single filers
- $626,000 for married couples filing jointly
If your business losses exceed these limits, the excess is not deductible in the current year. Instead, it is carried forward as a Net Operating Loss (NOL) to be used in future tax years.
A Quick History: From TCJA to Today
The Excess Business Loss limitation was introduced under the Tax Cuts and Jobs Act (TCJA) of 2017 and became effective for tax years beginning after December 31, 2017. Initially, this rule was set to expire after 2025, but the American Rescue Plan Act extended the limitation through 2028.
Its purpose? To curb the ability of high-income individuals to use significant business losses to offset other forms of income, thereby lowering their tax liabilities.
How to Calculate an Excess Business Loss
To determine whether the EBL limitation impacts you, follow these steps:
- Aggregate Business Deductions: Add up all deductions attributable to your trades or businesses.
- Aggregate Business Income and Gains: Add up all gross income and gains from those same businesses.
- Subtract Income from Deductions: The result is your net business loss.
- Compare to the Threshold: If your net business loss exceeds $313,000 (single) or $626,000 (joint), the amount over that limit is classified as an Excess Business Loss.
Important Exclusions:
- Wages: Your salary from employment does not count as business income.
- Capital Gains and Losses: Generally excluded unless tied directly to a trade or business.
Examples That Paint the Picture
Let’s illustrate how EBL works in real life:
Example 1: Single Filer – 2025
Alex, a self-employed graphic designer, reports:
- Business income: $100,000
- Business deductions: $420,000
Net business loss = $320,000
EBL threshold for single filers in 2025 = $313,000
Excess Business Loss = $320,000 – $313,000= $7,000
Alex can deduct $313,000 in 2025. The remaining $7,000 becomes a Net Operating Loss to carry forward.
Example 2: Married Filing Jointly – 2025
Jenna and Marco operate a construction business and file jointly. They report:
- Business income: $300,000
- Business deductions: $930,000
Net business loss = $630,000
EBL threshold for joint filers = $626,000
Excess Business Loss = $630,000 – $626,000 = $4,000
They can deduct $626,000 in 2025 and carry forward $4,000 as an NOL.
Treatment of EBLs: What Happens Next?
An Excess Business Loss doesn’t vanish into thin air. It becomes a Net Operating Loss (NOL), which:
- Cannot be carried back to previous tax years (with limited exceptions in the CARES Act for prior years).
- Can be carried forward indefinitely.
- Can only offset up to 80% of taxable income in any future year.
EBLs and Pass-Through Entities
Pass-through entities like partnerships and S corporations don’t pay tax at the entity level—the income (or loss) “passes through” to the individual owners. Each owner must apply the EBL limitation individually.
This means your business partner might be able to fully deduct their share of losses, while you might hit the EBL cap, depending on your other income sources, deductions, and filing status.
Other Limitations to Consider
Before EBL comes into play, your losses must first pass through other filters:
- At-Risk Rules: Limit losses to the amount you have invested and risked in the business.
- Passive Activity Loss Rules: Restrict losses from passive activities (like rental income) unless you have passive income to offset.
- Basis Limitations: You can’t deduct more than your basis (investment) in the entity.
These limitations apply first and can affect how much of your business loss is even eligible to be considered under the EBL rules.
Why It Matters: Strategic Planning Opportunities
Just because the IRS has rules doesn’t mean there aren’t smart ways to navigate them. Here are some planning tips:
Coordinate Timing of Income and Deductions: If you’re expecting a large deduction (e.g., bonus depreciation), it might make sense to accelerate income into the same year to stay under the EBL cap.
- Rethink Your Entity Structure: Depending on your circumstances, switching from a sole proprietorship to an S corp or LLC might open different planning opportunities.
- Forecast Your Income: If you anticipate higher income in the coming years, carrying forward NOLs might work in your favor.
- Avoid a Cascade of Limitations: Evaluate how the basis, passive loss, and at-risk rules interact with EBL. A tax professional can help map this out to ensure overlapping limits do not block you.
- Amortize vs. Expense: Rather than taking a large deduction all in one year, consider amortizing significant expenses to spread the benefit across multiple years—especially if it helps you stay under the EBL threshold.
- Plan Investments Strategically: Be aware that large investments may trigger significant deductions that may not be fully usable due to EBL limits.
- Monitor Legislative Updates: Tax laws are subject to frequent changes. Knowing what’s in the pipeline for Congress or IRS updates can help you pivot your strategy when needed.
Planning for the Future: A Long Game
The Excess Business Loss limitation is not a one-and-done issue. It demands forward-looking tax planning and a nuanced understanding of your income streams, deductions, and investments. As it currently stands, this rule is in effect through 2028; however, given the volatile nature of tax legislation, staying in touch with a knowledgeable advisor is crucial.
A good tax advisor can help you:
- Identify and maximize deductible expenses
- Model scenarios based on different income/deduction combinations
- Structure business activities to work within or around the EBL rules
Conclusion: EBLs Don’t Have to Be a Roadblock
Excess Business Losses can be a hurdle, but they don’t have to derail your tax strategy. With thoughtful planning, proper forecasting, and a little proactive work with your accounting team, EBLs can be managed effectively.
At Sorren, we believe that understanding the “why” behind every number empowers better decision-making. If you’re navigating a complex tax picture or are unsure how EBL rules impact your return, we’re here to help. Let’s build a strategy that supports your business today and positions you for tomorrow.
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