Here’s what HIVE AI had to say about “Are there changes to the Excess Business Loss limitation for non-corporate taxpayers under the One Big Beautiful Bill?”:
Changes to the Excess Business Loss Limitation for Non-Corporate Taxpayers Under the One Big Beautiful Bill
The One Big Beautiful Bill Act (OBBBA) introduces significant modifications to the excess business loss limitation rules under Section 461(l), fundamentally altering the landscape for non-corporate taxpayers who experience business losses. These changes represent both an extension of existing limitations and important adjustments to the calculation methodology that will impact business tax planning for years to come.
Permanent Extension of the Excess Business Loss Limitation
Section 461(l)(1) is amended by striking ” and before January 1, 2029, ” each place it appears One Big Beautiful Bill Act: Sec. 70601. Modification and extension of limitation on excess business losses of noncorporate taxpayers under the OBBBA. This modification makes the excess business loss limitation permanent rather than allowing it to expire in 2029 as originally scheduled. The amendments made by subsection (a) shall apply to taxable years beginning after December 31, 2026 One Big Beautiful Bill Act: Sec. 70601. Modification and extension of limitation on excess business losses of noncorporate taxpayers , ensuring that the limitation will continue indefinitely for non-corporate taxpayers.
The permanent nature of this limitation represents a significant policy shift that provides long-term certainty for tax planning purposes. If you are a noncorporate taxpayer and have allowable business losses after taking into account the basis limitations, the at-risk limitations (Form 6198), and then the passive loss limitations (Form 8582), your losses may be subject to the excess business loss limitation IRS – Publication 925: Passive Activity and At-Risk Rules . This hierarchical application of loss limitations ensures that the excess business loss rules serve as a final backstop after other loss limitation provisions have been applied.
Enhanced Inflation Adjustment Provisions
The OBBBA introduces comprehensive changes to the inflation adjustment mechanism for calculating excess business loss thresholds. Section 461(l)(3)(C) is amended— (1) in the matter preceding clause (i), by striking ” December 31, 2018 ” and inserting ” December 31, 2025 ” , and (2) in clause (ii), by striking ” 2017 ” and inserting ” 2024 ” One Big Beautiful Bill Act: Sec. 70601. Modification and extension of limitation on excess business losses of noncorporate taxpayers . These modifications reset the base year for inflation adjustments from 2018 to 2025, with the inflation calculation reference year changing from 2017 to 2024.
The amendments made by subsection (b) shall apply to taxable years beginning after December 31, 2025 One Big Beautiful Bill Act: Sec. 70601. Modification and extension of limitation on excess business losses of noncorporate taxpayers , meaning that the new inflation adjustment methodology will take effect one year earlier than the permanent extension of the limitation itself. This staggered implementation allows for a smooth transition to the enhanced calculation framework while providing taxpayers with updated threshold amounts that better reflect current economic conditions.
Fundamental Structure and Application of the Limitation
The basic framework of the excess business loss limitation remains unchanged under the OBBBA, maintaining the established definition and calculation methodology. The term “excess business loss” is defined generally as the excess (if any) of (a) the aggregate deductions for the taxable year attributable to trades or businesses of a non-corporate taxpayer, over (b) the sum of (i) the aggregate gross income or gain for the taxable year attributable to such trades or businesses of such taxpayer, and (ii) $250,000 ($500,000 in the case of a joint return) subject to adjustment for inflation for taxable years beginning after 2018 .
The limitation continues to operate as a final layer of loss restriction after other provisions have been applied. The at-risk limits and the passive activity limits are applied before figuring the amount of any excess business loss IRS – Instructions for Form 172, Net Operating Losses (NOLs) for Individuals, Estates, and Trusts . This sequential application ensures that taxpayers must first navigate the basis, at-risk, and passive activity loss limitations before determining whether they have an excess business loss subject to the Section 461(l) restriction.
Treatment of Disallowed Losses and Carryforward Provisions
The OBBBA maintains the existing treatment of disallowed excess business losses as net operating loss carryforwards. Any disallowed excess business loss is treated as a net operating loss (NOL) for the taxable year for purposes of determining any NOL carryover under § 172(b) for subsequent taxable years . This treatment provides taxpayers with the ability to utilize disallowed losses in future years, subject to the NOL carryforward limitations.
The excess is treated as an NOL to be carried forward. Further, when carryforwards can be used, they can only offset 80% of taxable income in future years IRS – Instructions for Form 172, Net Operating Losses (NOLs) for Individuals, Estates, and Trusts . This 80% limitation on NOL utilization, which was implemented as part of the Tax Cuts and Jobs Act, continues to apply to excess business losses that are converted to NOL carryforwards, creating an additional layer of limitation on the ultimate utilization of these losses.
Scope of Business Activities Subject to the Limitation
The excess business loss limitation applies broadly to various forms of business activities conducted by non-corporate taxpayers. A trade or business includes, but is not limited to, Schedule C and Schedule F activities, and certain activities reported on Schedule E. (In the case of a partnership or S corporation, although the limitation is applied at the partner or shareholder level, the trade or business determination is made at the entity’s level.) IRS – Instructions for Form 172, Net Operating Losses (NOLs) for Individuals, Estates, and Trusts
The comprehensive scope of the limitation extends beyond traditional operating activities to include certain capital transactions. Business gains and losses reported on Schedule D and Form 4797 are included in the excess business loss calculation IRS – Instructions for Form 172, Net Operating Losses (NOLs) for Individuals, Estates, and Trusts . This inclusion ensures that the limitation captures the full spectrum of business-related income and loss items, preventing taxpayers from avoiding the restriction through the characterization of losses as capital rather than ordinary.
Exclusions and Special Considerations
The excess business loss calculation includes specific exclusions that limit its scope in certain circumstances. An excess business loss is determined without regard to any deductions, gross income, or gains attributable to any trade or business of performing services as an employee . This exclusion ensures that W-2 wage income and related employee business expenses do not factor into the excess business loss calculation.
Capital loss treatment receives special consideration within the excess business loss framework. Capital loss deductions are not taken into account in computing an excess business loss. The amount of capital gain taken into account in calculating the excess business loss cannot exceed the lesser of capital gain net income attributable to a trade or business or capital gain net income . These provisions prevent the manipulation of the excess business loss calculation through capital loss timing strategies while ensuring that only net capital gains contribute to the income side of the calculation.
Administrative and Compliance Requirements
The practical application of the excess business loss limitation requires careful documentation and calculation by affected taxpayers. After taking into account all the other loss limitations, complete Form 461, Limitation on Business Losses, to figure the amount of your excess business loss. See Form 461 and its instructions for details on the excess business loss limitation IRS – Publication 925: Passive Activity and At-Risk Rules .
Use Form 461 to determine the amount of your excess business loss, if any. Your excess business loss will be included as income on line 8p of Schedule 1 (Form 1040) and treated as a net operating loss (NOL) that you must carry forward and deduct in a subsequent tax year. For more information about the excess business loss limitation, see Form 461 and its instructions IRS – Publication 334: Tax Guide for Small Business (For Individuals Who Use Schedule C) . This administrative framework ensures that taxpayers properly calculate and report their excess business losses while maintaining the appropriate carryforward treatment for disallowed amounts.
Economic Impact and Policy Implications
The permanent extension of the excess business loss limitation represents a significant revenue-raising measure that affects high-income business owners and entrepreneurs. The Tax Cuts and Jobs Act of 2017 limited the amount of losses from the trades or businesses of non-corporate taxpayers that can be claimed each year. For tax years 2018-2028, taxpayers cannot deduct an excess business loss in the current year. However, the excess business loss is treated as a net operating loss (NOL) carryover IRS IRM 4.19.15 Discretionary Programs .
The policy rationale behind the limitation is to prevent high-income individuals from using business losses to completely offset their non-business income, such as investment income, wages from other sources, or spouse’s income. By making this limitation permanent, the OBBBA ensures that this anti-abuse measure will continue to operate indefinitely, providing a consistent source of federal revenue while maintaining some level of loss utilization through the NOL carryforward mechanism.
Coordination with Other Tax Provisions
The excess business loss limitation operates within a complex framework of other loss limitation rules and tax provisions. The limitation must be coordinated with the at-risk rules under Section 465, the passive activity loss rules under Section 469, and the basis limitations that apply to partnership and S corporation investments. This coordination ensures that taxpayers cannot circumvent the various loss limitation regimes through entity structuring or transaction timing.
The permanent nature of the excess business loss limitation also requires coordination with other business tax incentives that have been enhanced or made permanent under the OBBBA. For example, the permanent extension of the Section 199A qualified business income deduction and the restoration of 100% bonus depreciation create offsetting benefits that may help mitigate the impact of the permanent loss limitation for some taxpayers.
Strategic Planning Considerations
The permanent extension of the excess business loss limitation necessitates long-term tax planning strategies for affected taxpayers. Business owners must consider the timing of income and deductions, the structure of their business operations, and the coordination of multiple business activities to optimize their tax position within the constraints of the limitation.
The reset of the inflation adjustment base year provides some relief by ensuring that the threshold amounts will be adjusted based on more recent economic conditions. However, the fundamental limitation remains in place, requiring taxpayers to plan for the deferral of excess business losses and their eventual utilization as NOL carryforwards subject to the 80% limitation.
The changes to the excess business loss limitation under the One Big Beautiful Bill Act represent a significant shift toward permanent loss limitation for non-corporate taxpayers. While the basic structure of the limitation remains unchanged, the permanent extension and enhanced inflation adjustments create a new landscape for business tax planning that requires careful consideration of loss timing, entity structure, and long-term tax strategy. The coordination of this limitation with other enhanced business tax incentives in the OBBBA creates both challenges and opportunities for affected taxpayers.
Sources
- One Big Beautiful Bill Act: Sec. 70601. Modification and extension of limitation on excess business losses of noncorporate taxpayers
- IRS – Publication 925: Passive Activity and At-Risk Rules
- IRS – Instructions for Form 172, Net Operating Losses (NOLs) for Individuals, Estates, and Trusts
- IRS – Publication 334: Tax Guide for Small Business (For Individuals Who Use Schedule C)
- IRS Notice 2021-8
- IRS IRM 4.19.15 Discretionary Programs
- IRC § 461(l)
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