What the OBBBA Means for Excess Business Losses
Published on by Daniel Schlachter in Tax Services
The One, Big, Beautiful Bill Act (OBBBA) has brought about a variety of changes to the tax landscape, including a key change pertaining to the excess business loss (EBL) limitation. This provision, initially a part of the Tax Cuts and Jobs Act of 2017, has been made permanent by the OBBBA. Aimed at non-corporate taxpayers, including individuals, trusts and estates, this rule aims to limit the extent to which business losses can be used to offset other forms of income.
The concept of excess business loss
Excess business loss arises when total deductions from all trade or business activities surpass the sum of total business income and a specific threshold. For single filers, this threshold is $250,000, adjusted annually for inflation. For joint filers, the threshold is $500,000. In 2025, these thresholds, adjusted for inflation, stand at $313,000 for single filers and $626,000 for joint filers.
Treatment of disallowed losses
The portion of the loss that exceeds the allowable threshold is not lost. Instead, it gets carried forward as a Net Operating Loss (NOL) and can be used to offset taxable income in future years. The EBL limitation applies at an individual level for partners in a partnership or shareholders in an S corporation rather than at the entity level. Notably, the EBL limitation is applied only after any passive activity loss limitations have been taken into account.
Impact of capital gains and losses
Capital gains and losses play a role in the calculation of excess business loss. Capital losses attributable to a trade or business increase the disallowed excess business loss, while capital gains associated with a trade or business reduce it. It is important to note that capital gains or losses unrelated to a trade or business do not factor into the EBL calculation.
In practical terms, consider a married couple filing jointly who have $300,000 in business income, $1,200,000 in business losses and $100,000 in wages. The excess business loss would be calculated as $1,200,000 – ($300,000 + $626,000), which equals $274,000. This amount becomes an NOL that is carried forward to the next tax year.
EBL under OBBBA: key takeaways
As per OBBBA, the excess business loss rule applies to non-corporate taxpayers, with a limitation amount of $250,000 for single filers and $500,000 for joint filers, adjusted annually for inflation. If losses exceed this threshold, the disallowed loss is treated as an NOL and carried over to the subsequent year.
Business-related capital gains and losses do impact the EBL calculation, while those unrelated to the business do not. This rule applies at the individual partner or shareholder level for pass-through entities. Importantly, as a result of the OBBBA, this provision is now permanent.
This extension of the EBL limitation by the OBBBA underscores the need for strategic tax planning and highlights the complexity of tax law changes. Taxpayers should consult with a tax professional to understand how these changes may impact their individual or business tax situation.
What’s next
Have questions about how the OBBBA’s excess business loss rules may impact your tax strategy? Contact us today for a free consultation with one of our experienced tax advisors. You may also be interested in our coverage of the OBBBA and its impacts on businesses and individuals. As always, we’re here to help.
