When it comes to tax planning, it’s never too early to start preparing for the current year. Understanding the rules surrounding excess business losses (EBLs) is essential for business owners, partners, and shareholders of pass-through entities. These limitations, originally introduced under the Tax Cuts and Jobs Act (TCJA) and later modified by subsequent legislation, can significantly impact tax liability and cash flow.
Recent Legislative Changes and Extension of EBL Rules
The Coronavirus Aid, Relief, and Economic Security (CARES) Act initially delayed the application of the excess business loss limitation until tax years beginning after December 31, 2020. However, under the Inflation Reduction Act of 2022, this limitation has been extended through December 31, 2028, meaning it remains in effect for the current tax year and beyond.
Defining Excess Business Losses
An excess business loss occurs when a taxpayer’s aggregate deductions from trades or businesses exceed their aggregate gross income or gains from those businesses, plus a threshold amount. For the 2025 tax year, this threshold is:
- $313,000 for single filers
- $626,000 for joint filers
Any business losses exceeding this threshold are subject to limitations and may impact a taxpayer’s ability to offset other income.
What Qualifies as a Trade or Business?
For tax purposes, a “trade or business” includes, but is not limited to:
- Sole proprietorships reported on Schedule C
- Farming activities reported on Schedule F
- Rental activities and pass-through business income reported on Schedule E
- Farm rental income reported on Form 4835
- Gains and losses from business property sales reported on Form 4797
- Capital gains and losses from business investments reported on Form 8949
These limitations apply after considering other tax rules, such as at-risk limitations and passive activity loss rules.
Impact on Taxpayers and Loss Carryovers
For noncorporate taxpayers, any disallowed excess business losses must be carried forward as a net operating loss (NOL) to the following tax year. However, there are additional considerations regarding how these losses can be utilized:
- The carryforward period for NOLs is unlimited for losses incurred in tax years beginning after 2020.
- NOLs arising post-2017 may only offset up to 80% of taxable income in a future year.
- Certain exceptions apply: Non-life insurance companies are not subject to the 80% limitation. Farming losses and non-life insurance company losses may also qualify for a two-year carryback period.
Tax Planning Considerations
Given the complexities of excess business loss limitations, it is crucial for business owners and investors to take proactive steps, such as:
- Reviewing loss carryovers to determine the impact of excess business losses on taxable income.
- Exploring tax planning strategies to optimize deductions and increase cash flow.
- Understanding entity structures to evaluate whether pass-through income and losses align with tax objectives.
Next Steps: Contact Our Office
Effective tax planning requires a comprehensive review of your financial situation and business activities. If you anticipate excess business losses this year or have questions about your eligibility for NOL carryovers, we encourage you to reach out to a trustworthy accountant . The Chugh, LLP accounting team is here to help you navigate these complex tax rules and develop strategies that align with your financial goals.
Contact us today to schedule a consultation and ensure you are maximizing your tax benefits while maintaining compliance with current regulations.
