New Excess Business Loss Rules

May 10th, 2025 at 6:52 AM

For 2025, it’s crucial to understand how recent tax law changes may impact your ability to deduct business losses. One such provision, the excess business loss disallowance rule, could limit how much of your business loss you can deduct each year—and delay the tax benefits you expect.

What Is the Excess Business Loss Rule?

Enacted as part of the Tax Cuts and Jobs Act (TCJA) and extended through 2028, the excess business loss rule restricts the aggregate business losses an individual taxpayer can deduct against non-business income, such as wages, investment income, or capital gains. For the tax year 2025, the thresholds are:

• $313,000 for single filers
• $626,000 for married couples filing jointly

Losses exceeding the limits must be treated as a net operating loss (NOL) and carried forward to future years—where the NOL can offset no more than 80 percent of taxable income in any given year.

But First: Passive Activity Losses

Before the excess business loss rule applies, your business losses must first pass the passive activity loss (PAL) test. If your losses are considered passive—due to limited participation or rental classification—they may already be disallowed until you either have sufficient passive income or dispose of the activity. Only losses that survive the PAL test are then subject to the excess business loss rule.

Why This Matters to You

If your business activities generate substantial losses, this rule could significantly delay your tax relief, particularly if you have significant income from other sources. Even losses from partnerships, LLCs, and S corporations are subject to these limitations—calculated at the individual level.

Mark S. Fineberg, CPA