Every year, business owners, self-employed individuals, and investors may face losses that exceed what the IRS allows them to deduct in a single tax year. Understanding what can you use excess business losses against isn’t just a technicality, it can impact your tax bill, cash flow, and long-term planning.
Excess business losses, often abbreviated as EBLs, occur when your allowable business deductions surpass certain IRS thresholds for non-corporate taxpayers. These losses don’t disappear, they may be carried forward as a net operating loss (NOL), or in some cases, applied against other types of income. The key is knowing how they work and how to apply them correctly.
In this guide, we’ll break down excess business losses in plain English, explain how they can offset different types of income, explore IRS limits, and show how various business structures handle them.
What Can You Use Excess Business Losses Against?
Understanding Excess Business Losses
At its core, an excess business loss happens when your total business losses for a year exceed the IRS limitation for non-corporate taxpayers. The IRS defines this threshold to prevent taxpayers with high non-business income from fully offsetting it with business losses.
For example, in 2025, a single taxpayer can only deduct up to $364,000 in business losses before the excess amount must be carried forward. Married couples filing jointly have a higher limit. Any loss above this threshold is considered an excess business loss.
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Income Types You Can Offset with Excess Business Losses
Excess business losses can be applied against certain types of income, subject to IRS rules. The main categories include:
1. Capital Gains
- Business losses may reduce your capital gains from selling stocks, real estate, or other investments.
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2. Passive Income
- Losses may offset passive income, such as rental income, royalties, or profits from limited partnerships.
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3. Non-Business Income
- Some non-business income, including dividends, interest, or other investment income, may be reduced by your losses, depending on IRS rules.
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4. Ordinary Income
- Business losses can also offset ordinary income like wages or salaries, but only up to IRS limits.
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Tip: Always check IRS rules for your filing year, as limits are adjusted annually and may differ based on filing status.
Carryforward, Carryback & NOL-Related Concepts
Understanding how to handle excess business losses beyond the current year is crucial for tax planning.
Carryforward Rules
- Any business loss exceeding the IRS annual limit cannot be deducted immediately but is carried forward as a net operating loss (NOL) to future tax years.
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Conversion to Net Operating Loss (NOL)
- Excess business losses convert into NOLs, which can offset future taxable income.
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Carryback Rules
- Although less common under current law, some businesses may be able to carry back losses to previous tax years in specific scenarios.
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Comparison with NOL
- Unlike standard NOLs, excess business losses are the portion of losses over the IRS limit. Understanding the distinction helps in planning deductions correctly.
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Business Structure-Specific Rules
How excess business losses are handled depends heavily on your business structure.
Sole Proprietors and Self-Employed Individuals
- Sole proprietors report their business income and losses on Schedule C, which flows into their individual tax return.
- IRS rules limit the amount of business losses that can offset other income in a given year.
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Partnerships, LLCs, and S Corporations
- Pass-through entities report losses on Schedule K-1, which then flows through to individual owners’ returns.
- Losses are subject to the EBL limitation per taxpayer and filing status.
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Beginner-Friendly Explanation
Excess Business Losses for Beginners
- For new business owners, it’s helpful to simplify: if your business losses are more than the IRS allows, the extra losses can’t reduce your taxes this year—but you can carry them forward.
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Step-by-Step Example
- Example: A self-employed consultant has $500,000 in business losses in 2025, but the IRS limit for a single filer is $364,000.
- Deductible losses in 2025: $364,000
- Excess business loss: $136,000, which can be carried forward as an NOL to future tax years.
- Deductible losses in 2025: $364,000
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Comparison & Rule Clarification
Annual Limits and Thresholds
- IRS sets yearly thresholds to prevent excessive offsets of other income.
- Example for 2025: $364,000 for single taxpayers, $728,000 for married filing jointly.
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Excess Business Loss vs Regular Business Loss
- A regular business loss is fully deductible if it does not exceed IRS limits.
- Excess business loss refers specifically to the portion above the IRS annual limitation.
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Informational & Planning-Focused Considerations
Excess business losses aren’t just a technical tax term, they’re a planning tool for savvy business owners. Knowing how and when to apply them can have a significant impact on your tax liability and overall financial strategy.
Why Excess Business Losses Are Limited
The IRS imposes limits on how much a taxpayer can deduct in a single year to prevent high-income individuals from using business losses to wipe out other types of income entirely. Essentially, the limitation ensures that losses reflect real operational outcomes rather than creating a loophole to reduce tax bills drastically.
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- Example explanation: If a taxpayer earns significant wages or investment income, the EBL limitation ensures only a portion of their business losses can offset that income in the current year.
When Excess Business Losses Apply
Excess business losses come into play whenever total allowable business deductions exceed the IRS annual threshold. Understanding the timing is crucial:
- Taxpayers must first apply losses up to the limit against ordinary business income.
- Any remaining losses above the threshold are treated as excess business losses.
- These excess amounts are carried forward as net operating losses (NOLs), which can offset future taxable income.
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How to Use Excess Business Losses Strategically
Properly applying excess business losses can enhance financial planning:
- Offset Future Income – Carry forward EBLs as NOLs to reduce taxable income in future profitable years.
- Plan Business Expenses – Timing the recognition of deductions or losses can maximize the current-year benefit within IRS limits.
- Coordinate Across Entities – For pass-through entities, understanding which owners can claim EBLs ensures no deductions are wasted.
- Monitor Adjusted Gross Income (AGI) – Since excess business losses impact AGI, careful planning can help maintain eligibility for tax credits and deductions.
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Related Tax and Accounting Concepts
To fully understand excess business losses, it’s helpful to consider related accounting and tax concepts that often appear alongside EBLs:
- Net Operating Losses (NOLs) – Losses that are carried forward (or in limited cases backward) to offset taxable income in other years.
- Taxable Income Adjustments – How losses and deductions change your taxable income for the year.
- Pass-Through Losses – Losses from partnerships, S corporations, or LLCs reported on individual returns.
- Business Loss Deduction Limits – IRS rules that determine how much of a loss is deductible each year.
- Tax Loss Carryforwards – EBLs carried forward as NOLs to reduce future tax liability.
- Adjusted Gross Income (AGI) – Total income after deductions, which can be affected by excess business losses.
- Nonbusiness Income – Income types like wages, dividends, and interest that may be partially offset by business losses.
- IRS Tax Limitations – Legal thresholds that restrict deductions, including the EBL limit.
- Individual Income Tax Rules – Overall regulations that govern how excess business losses impact a taxpayer’s return.
Integrating these concepts ensures you understand where EBLs fit into the bigger tax picture, how they interact with other deductions, and their long-term implications.
Practical Application Example
Let’s look at a real-world scenario:
- A self-employed consultant earns $100,000 from their business but incurs $500,000 in deductible business expenses in 2025.
- The IRS single-filer EBL limit is $364,000.
- Deductible loss in 2025: $364,000
- Excess business loss: $136,000 → carried forward as an NOL
- Future years: The $136,000 can offset taxable income until fully used
This example illustrates how EBLs are applied in practice, showing both the current-year deduction and the future benefit through carryforward. It also reinforces the importance of planning losses and expenses strategically.
Key Takeaways for Business Owners
- Track Losses Carefully – Maintain accurate records of all business deductions to ensure proper application of EBLs.
- Understand Your Filing Status – IRS thresholds differ for single, married, or head-of-household filers.
- Plan for Future Income – EBLs can provide future tax relief when carried forward as NOLs.
- Coordinate Across Business Structures – Pass-through entities require careful tracking to maximize deductions for individual owners.
- Consult Tax Professionals – EBL rules are complex, and professional guidance ensures compliance and maximizes tax benefits.
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