New Tax Law Makes the Excess Business Loss Rule Permanent

President Donald Trump signed and enacted the Reconciliation Bill H. R. 1 on July 4th, 2025. One provision in the bill makes the excess business loss limitation (EBL) under Section 461(l) permanent, while also lowering the threshold for application by reversing recent inflation adjustments. The final released version states that the EBL will continue to be treated as a net operating loss (NOL) in the subsequent years. Originally, the EBL was set to expire in 2028; however, the bill has made the limitation permanent.

An EBL refers to the amount by which a noncorporate taxpayer’s total deductions from all trades or businesses exceed the total gross income and gains from those businesses plus a specific threshold amount that is adjusted for cost of living. This limitation is applied at the partner or shareholder level for pass-through entities. The at-risk limits, along with passive activity limits, are applied before calculating the amount of any potential EBL.

Congress initially enacted the EBL limitation to limit wealthy taxpayers from using large pass-through losses to offset variable incomes such as wage or investment income. The threshold amounts for taxable years beginning in 2021 are $262,000 for single filers and $524,000 for joint filers. In 2025, the threshold amount will increase to $313,000 for single filers and $626,000 for joint filers. Once this threshold amount has been reached, any amount over it will be nondeductible in the current year and will be treated as net operating losses that will carry over to the following taxable years. As a result, the EBL limitation primarily affects high-income taxpayers with substantial pass-through losses, ensuring that losses from their businesses cannot disproportionately reduce their overall taxable income within a given year. However, this limitation also impacts business owners who are truly experiencing losses since they may not be able to deduct the full losses in the year they occur. This could potentially cause strained cash flow and limited flexibility for recovery and/or reinvestment. 

To best prepare for this new provision, taxpayers with pass-through businesses should review their projected business incomes and losses and bring this to their trusted tax advisors to use losses efficiently within the new limits. They can also consider different strategies for deferring certain deductions or accelerating income while keeping in mind what the potential impact on long-term planning could look like. It is now more important to become proactive in planning to minimize any unexpected tax consequences under this extended provision.

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