Starting in 2026, the rules around Excess Business Loss (EBL) are set for another reset. Individual taxpayers, especially entrepreneurs and small business owners, must understand how the IRS thresholds will impact deductions, tax planning, and future cash flow. This blog explains what’s changing, why it matters, and what steps you should take today to avoid unexpected tax bills.
A Quick Recap: Excess Business Loss Rules
Under IRC Section 461(l), noncorporate taxpayers cannot deduct business losses that exceed the annual IRS threshold. For 2025, the caps are $313,000 (single) and $626,000 (married filing jointly). Any losses above these thresholds are reclassified as Net Operating Losses (NOLs) and carried forward into future years.
What Happens in 2026?
Unless Congress acts, the EBL rules remain in place through 2028. However, the IRS adjusts thresholds each year for inflation, and 2026 will bring reset values based on updated cost-of-living adjustments.
Why does this matter? Because business owners with large deductions could find more of their losses disallowed, leading to higher taxable income in the current year and deferred relief in future years.
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Why the Reset Matters for Entrepreneurs
- Cash flow impact: Immediate tax deductions may shrink, reducing refunds or increasing balances due.
- NOL build-up: Disallowed losses carry forward but may not match your future income needs.
- Audit risk: Misreporting business vs. personal expenses is more closely monitored under EBL rules.
- Long-term planning: Entrepreneurs need proactive strategies for timing deductions and income recognition.
Smart Planning Moves for 2026
- Review business structure: Consider whether operating as a C corporation provides better flexibility.
- Time income & deductions: Spread out large expenses to avoid surpassing the EBL limits in one year.
- Coordinate with NOL strategies: Understand how future carryforwards may offset taxable income.
- Work with professionals: A tax advisor can help identify opportunities for deferral and acceleration.
Example Scenario
Imagine a married couple filing jointly with $1 million in business losses in 2026. If the new threshold is $640,000, they can only deduct that amount. The remaining $360,000 becomes an NOL carried forward. While they get eventual relief, the timing could affect cash flow, estimated taxes, and planning.
Key Takeaways for 2026
- EBL thresholds reset annually with inflation—plan around the 2026 numbers.
- Losses beyond the limit are not deductible immediately but become NOLs.
- Entrepreneurs should evaluate entity choice, deduction timing, and cash flow management.
- Proactive planning in 2025 can reduce exposure when the 2026 reset arrives.
