How the Excess Business Loss Limitation 2025 Affects Your Taxes

Imagine this: You’re a hardworking small business owner. You’ve poured money, time, and energy into your business. But this year, things didn’t go as planned. You faced a big loss—and now you’re counting on that loss to lower your tax bill. But when you sit down to file your taxes, the IRS says, “Hold on. You can’t deduct the whole thing.”

Why? Because of a rule called the Excess Business Loss (EBL) limitation.

This rule was designed to stop wealthy taxpayers from using massive business losses to cancel out other types of income, like investment gains or W-2 earnings. It’s been around since the 2017 Tax Cuts and Jobs Act (TCJA), and it’s here to stay—at least until 2028, thanks to the Inflation Reduction Act.

For 2025, the rule affects anyone who owns a business and pays taxes as an individual—sole proprietors, partners, and S-corp shareholders. The thresholds have been adjusted for inflation: $313,000 for single filers and $626,000 for joint filers.

Let’s break this all down so you know exactly what it means for your tax return—and your wallet.

What Is the Excess Business Loss Limitation?

The Excess Business Loss limitation kicks in when your business deductions are more than your business income plus the IRS threshold.

So for 2025:

• If you’re single, your threshold is $313,000.
• If you’re married and filing jointly, it’s $626,000.

This rule applies to noncorporate taxpayers—that means if you’re a:

• Sole proprietor (filing Schedule C),
• Farmer (Schedule F),
• Member of an LLC,
• Partner in a partnership,
• Or shareholder in an S corporation…

…you could be affected.

Now, here’s the kicker: if your business losses go over the threshold, you can’t deduct the extra loss this year. But you don’t lose it forever. Instead, the disallowed amount turns into a Net Operating Loss (NOL) and carries forward to future years. You can then use it to offset up to 80% of your taxable income.

It’s like putting the extra loss in a box labeled “Use Next Year.”

What Counts as a “Business Loss”?

Not all losses are treated the same in the eyes of the IRS.

The EBL limitation only applies to business losses, like:

• Losses reported on Schedule C (for sole proprietors),
• Losses from farming on Schedule F,
• Losses passed through to you on a K-1 form from a partnership or S-corp.

What doesn’t count?

• Wages
• Capital losses
• Investment losses
• Personal deductions like mortgage interest or student loan interest

So, if you lost money in your side business but made a salary at your day job, the IRS may limit how much of that business loss you can use to lower your total income tax.

Interaction with Other Rules

The EBL limitation isn’t the first rule that steps in when you’re reporting losses. It actually comes after other restrictions like:

• Passive Activity Loss (PAL) rules, and
• At-risk rules

Let’s say you’re a real estate investor. Your rental losses may already be limited by PAL rules. But even if you qualify as a real estate professional and avoid the PAL rule, you could still be hit by the Excess Business Loss cap.

This stacking of rules makes it essential to understand where your deductions stand before assuming your entire business loss will benefit your income taxes.

Key Changes in Excess Business Loss Limitation for 2025

Here are some important changes in excess business loss limitation for 2025:

Inflation-Adjusted Thresholds

Here’s what’s new for 2025:

• Single filers: $313,000
• Joint filers: $626,000

That’s up from $305K / $610K in 2024. These changes reflect inflation, but compared to pre-TCJA times (when there was no EBL cap), it’s a big difference for business owners.

The government adjusts these numbers every year to match the cost of living, but the structure of the rule stays the same.

Legislative Updates

Back in 2021, lawmakers proposed extending the EBL rule permanently through the Build Back Better Act (BBB Act). That didn’t pass, but the rule is still in place until 2028, thanks to the Inflation Reduction Act.

So, if you were hoping this rule would go away soon, think again. It’s part of current United States tax law, and it will likely be part of your tax planning for the next few years.

Impact of NOL Rules

Let’s say your business loss is limited in 2025. That amount becomes a Net Operating Loss that rolls forward.

But there are limits:

• No carryback allowed (except for farmers)
• Can only use it to offset up to 80% of taxable income in future years

This rule affects personal taxes, business owners, and even large corporations, especially those with flow-through entities like LLCs and S-corps.