The excess business loss limitation under Section 461(l) caps how much net business loss a noncorporate taxpayer can deduct against non-business income like wages and investment gains in a single year. Aggregate business losses beyond the annual threshold (indexed; $313,000 single and $626,000 joint for 2025) are disallowed for the year and convert into a net operating loss carryforward, deductible in later years under NOL rules. The limitation was made permanent by the 2025 tax legislation. It is the last of four gates a loss must pass (basis, at-risk, passive, then 461(l)) and bites hardest on taxpayers using large bonus depreciation losses, such as cost-segregated real estate under REPS or the short-term rental rules, to shelter big W-2 or capital gain years: the loss still works, but only up to the cap now, with the rest deferred a year. Wages are not business income for this test.
Excess Business Loss Limitation
Primary authority: IRC §461(l); Form 461
The authority behind it
IRC §461(l); Form 461
Every entry in this glossary cites the statute, regulation, or IRS guidance behind it.
Worked example
A married real estate professional generates an $900,000 rental loss via cost segregation against her spouse's $1,200,000 of wages. Only $626,000 deducts this year; the remaining $274,000 becomes an NOL usable next year.
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Related terms
Net Operating Loss (NOL)
A net operating loss arises when your allowable deductions exceed your gross income for the year, so the business...
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