Section 461(l) limits how much net business loss an individual can deduct against non-business income in a single year. The One Big Beautiful Bill Act (OBBBA), signed July 4, 2025, permanently extended the rule and reset the threshold amounts. If you own a pass-through business generating significant losses, this rule directly affects your personal return.
What Counts as a Business Loss Under Section 461(l)?
The rule aggregates all trade or business activity across every entity you own. Sources that feed into the calculation include:
- Schedule C business losses
- Pass-through losses from partnerships and S-corps on Schedule K-1
- Farm losses on Schedule F
- Rental losses if you qualify as a real estate professional under IRC 469
Non-business income does not count as business income for this test. W-2 wages, interest, dividends, capital gains, and Social Security are all non-business. The excess business loss rules apply after the passive activity loss rules (Form 8582) and at-risk rules (Form 6198), so losses disallowed by those rules never reach Section 461(l) to begin with.
How the Excess Business Loss Calculation Works
The 2026 threshold is $256,000 for single filers (and married filing separately) or $512,000 for married filing jointly, indexed for inflation going forward.
Example: You are single with $50,000 in W-2 wages and a pass-through business loss of $380,000. After applying at-risk and passive activity rules, the full $380,000 survives.
- Threshold: $256,000
- Deductible business loss: $256,000
- Excess business loss disallowed in 2026: $124,000
The $124,000 does not simply disappear. It converts to a net operating loss carryforward that offsets taxable income in future years.
The NOL Carryforward Has Its Own Limits
CautionDisallowed excess losses become an NOL carryforward. Under current law, NOL carryforwards are limited to 80% of taxable income in any carryforward year and cannot be carried back to prior years. If you planned to use the full business loss against a large gain, you may need to rethink the timing.
What OBBBA Changed
Before OBBBA, Section 461(l) was a temporary provision scheduled to expire after 2028. OBBBA permanently extended the rule and reset the base threshold to $256,000 single / $512,000 MFJ, with inflation indexing continuing from that new base.
The key planning shift: you can no longer count on the limitation sunsetting. The rule is now a permanent feature of the tax code for all pass-through owners with large losses.
Year-End Strategies Before December 31
Accelerate business income. Pulling deferred income into 2026 (billing a client before year-end, triggering an installment sale payment) can reduce or eliminate the excess. The more business income you recognize, the higher your effective floor for deductions.
Time bonus depreciation elections carefully. Taking large Section 179 or bonus depreciation deductions in a single year can push you over the threshold. Spreading elections over two years may let you deduct the full loss in both years and avoid pushing any excess into a carryforward.
Model the NOL carryforward value. If you will exceed the threshold regardless of planning, make sure your accountant tracks the resulting NOL and applies it in the first year it provides maximum benefit, ideally a year with a large gain and no other deduction offsets. For the NOL rules that govern how carryforwards are used, see net operating loss rules for 2026.
Review real estate professional status. If you qualify as a real estate professional and aggregate rental activities, large depreciation deductions from cost segregation studies can quickly exceed the Section 461(l) threshold. Model total net business loss before filing and plan accordingly.
Questions about how Section 461(l) affects your pass-through losses? Contact TS CPA for a free consultation. We respond within the same day.