Big losses from a business or rental property don't always deliver the immediate tax relief people expect. In recent years, the rules have become much stricter — and starting in 2026, even more taxpayers will feel the impact.
If you have sizable business or rental losses, you may no longer be able to deduct the full amount in the year the loss occurs. Instead, part of the loss could be delayed and used in future years. That timing difference can significantly affect cash flow and tax planning.
Here's what you need to know about how significant business losses are limited, how the rules are changing and when they could apply to you.
Before the Tax Cuts and Jobs Act (TCJA) was enacted in 2017, business owners could generally deduct business losses in the same tax year they occurred. That immediate tax relief was available unless:
The TCJA first imposed the excess business loss disallowance rule, effective for tax years beginning in 2018 through 2025. Subsequent legislation extended and modified the rule.
Now, the rule is facing further changes. Starting in tax year 2026, under the One Big Beautiful Bill Act (OBBBA), the excess business loss disallowance rule will become more restrictive and a permanent fixture in the tax landscape. This makes planning ahead more important than ever. Before the OBBBA, the rule was scheduled to expire after 2028.
An excess business loss occurs when a noncorporate taxpayer's total business losses for the year exceed a specified inflation-adjusted limit. For 2025, that limit is $313,000 for single filers and $626,000 for married couples filing jointly.
The limitation is intended to restrict an individual taxpayer's ability to use current-year business losses, including losses from rental activities, to offset income such as wages, interest, dividends and capital gains. Any business loss that exceeds the applicable limit must be treated as an NOL and carried forward. This defers the tax benefit until a future tax year.
Important: You apply the excess business loss disallowance rule after applying the PAL rules. If a loss is disallowed under PAL rules, it doesn't move on to this limitation because it has already been restricted.
Under the current rules, you typically can't use an NOL carryover, including one from an excess business loss, to offset more than 80% of your taxable income in the carryover year. You also generally can't carry back an NOL to an earlier tax year; instead, it must be carried forward.
You can carry an NOL forward indefinitely until it's used, but because an excess business loss must be treated as an NOL, you can't use that portion of the loss in the year it occurs. As a result, any tax benefit from the excess loss is deferred until at least the following year.
Legislation enacted in July 2025 made the excess business loss limitation permanent and modified how the inflation adjustment is calculated. As a result, for tax years beginning in 2026 (returns filed in 2027), the excess loss thresholds decrease to $256,000 for single filers and $512,000 for joint filers. These lower thresholds increase the likelihood that a portion of large business losses will be deferred to future years.
The following examples illustrate how the excess business loss rule can work:
1. Rental property loss in 2025. In 2025, after applying the PAL rules, George, who's unmarried, had an allowable rental property tax loss of $400,000. He had no other taxable income or losses from business or rental activities. However, he had $500,000 of taxable income from nonbusiness sources, such as wages and investment income.
Because the 2025 excess business loss threshold for a single taxpayer is $313,000, George has an excess business loss of $87,000 for the year ($400,000 minus $313,000). He can deduct $313,000 of the rental loss against his other income in 2025. The $87,000 excess business loss is treated as an NOL that he can carry forward to 2026, where it can be used to offset up to 80% of taxable income, pursuant to the NOL carryforward rules.
2. Rental property loss in 2026. In 2026, George has a $400,000 loss from rental property. Because the excess business loss threshold for a single taxpayer in 2026 is $256,000, George ends up with an excess business loss of $144,000 ($400,000 minus $256,000).
He can deduct $256,000 of the rental loss against income from other sources in 2026. The $144,000 excess business loss is treated as an NOL and carried forward to 2027, where it can be deducted subject to the NOL carryforward rules.
3. No excess business loss. Returning to the 2025 example, let's assume instead that George's allowable rental property loss, after applying the PAL rules, is $300,000. Because the loss is below the $313,000 excess business loss threshold for 2025, George doesn't have an excess business loss. As a result, the excess business loss limitation doesn't apply, and he can use the full $300,000 rental loss to offset income from other sources.
4. Married couple with business losses from two sources. Sarah and Tom are joint filers. In 2025, Sarah has a $50,000 tax loss from her business, a single-member limited liability company (SMLLC) that's treated as a sole proprietorship for federal income tax purposes. Tom operates a separate SMLLC business that incurs a $550,000 tax loss in 2025. They have no taxable income or losses from other business activities. But they have $800,000 of taxable income from nonbusiness sources.
Their combined business losses total $600,000, which is below the $626,000 excess business loss threshold for joint filers in 2025. As a result, the excess business loss limitation doesn't apply, and they can use the full $600,000 of business losses to offset income from other sources on their joint Form 1040.
If you have business losses from partnerships, limited liability companies (LLCs) treated as partnerships for federal income tax purposes, or S corporations, the excess business loss disallowance rule applies to you at the owner level. It's also taken into account on your Form 1040. Each owner's share of the business's taxable income, gains, deductions or losses is passed through to the owner's Form 1040.
Let's look at an example. In late 2025, Janice and a business associate became equal owners of a new LLC taxed as a partnership. Each invested $500,000 in the business. Janice is single. Her partner, Kevin, is married and files a joint return.
In 2026, the LLC reports a $900,000 net loss, with $450,000 allocated to each owner. Because both owners materially participate in the business, the PAL rules don't apply. Neither owner has other business income. Janice has $350,000 in nonbusiness taxable income from a trust, and Kevin's spouse has $250,000 in salary income.
Because the excess business loss limitation applies at the owner level, the results differ. Janice's $450,000 loss exceeds the $256,000 threshold for single filers in 2026, resulting in an excess business loss of $194,000. She can deduct $256,000 of the loss against her trust income on her 2026 Form 1040. The remaining $194,000 is treated as an NOL carried forward to the 2027 tax year.
Kevin's $450,000 loss doesn't exceed the $512,000 threshold for joint filers in 2026. He can deduct $250,000 of the loss against his spouse's salary income in 2026. The remaining $200,000 creates an NOL carried forward to the 2027 tax year.
The excess business loss limitation rule applies only when business losses exceed specific thresholds. Although many taxpayers remain outside this rule's scope, the lower thresholds beginning in 2026 will make it more relevant for some business owners. If you expect significant business losses, contact us to discuss ways to possibly reduce or eliminate your exposure to the excess business loss rule.
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