For 2025, the IRS continues enforcing the Excess Business Loss (EBL) rules under IRC Sec. 461(l). These rules prevent noncorporate taxpayers from deducting losses that exceed specific thresholds—$313,000 for single filers and $626,000 for joint filers. Let’s explore how these limits apply, how deferrals work, and what strategies individual taxpayers can use for effective tax planning.
What Is an Excess Business Loss?
An Excess Business Loss (EBL) occurs when your total deductions from all trades or businesses exceed your total business income by more than the IRS limit. This restriction, introduced under the Tax Cuts and Jobs Act (TCJA), applies to sole proprietors, partnerships, and S corporation owners.
2025 Excess Business Loss Limits
- Single filers: $313,000
- Married filing jointly: $626,000
Any business losses beyond these thresholds cannot be deducted in the current year. Instead, they are converted into Net Operating Losses (NOLs) and carried forward to future years.
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How Deferrals Work
Instead of being permanently lost, excess losses are deferred. They automatically become part of your NOL carryforward, subject to the 80% of taxable income limitation. This means while you can’t take the deduction now, you’ll get tax relief in future years as income allows.
Example: If a married couple reports $900,000 in total business losses, only $626,000 is deductible in 2025. The remaining $274,000 is carried forward as an NOL.
Tax Planning Strategies for 2025
- Time your deductions: Spread large deductions over multiple years to avoid triggering the EBL limit.
- Income shifting: Accelerate income in high-loss years to maximize deductible amounts.
- Combine with NOL planning: Track carryforwards and integrate with your NOL strategy for long-term benefits.
- Entity considerations: Review whether a corporate structure could better handle large losses.
Who Is Impacted?
These rules primarily affect high-income entrepreneurs, real estate investors, and business owners with significant losses. Passive activity loss rules may also apply, making it essential to review your tax position carefully each year.
Key Takeaways
- Excess business losses above $313k (single) / $626k (joint) are not deductible in 2025.
- Disallowed losses are converted to NOLs and carried forward indefinitely.
- Strategic planning can minimize deferrals and maximize current deductions.
- Professional tax advice is critical for taxpayers with large fluctuating business income.
