July 4, 2025
Internal Revenue Code (IRC) § 461(l), the excess business loss (EBL) limitation, represents one of the most significant and complex provisions for noncorporate taxpayers. Initially introduced by the Tax Cuts and Jobs Act of 2017 (TCJA), it establishes a formidable barrier for those seeking to offset large business losses against their other sources of income. The rule's primary function is not to permanently disallow legitimate business losses, but rather to defer their tax benefit by limiting the amount of net business loss that can be deducted against non-business income—such as wages, salaries, interest, dividends, and capital gains—in a single tax year. Any business loss disallowed under § 461(l) is not lost forever. Instead, it is converted into a Net Operating Loss (NOL) carryforward, which can be utilized in subsequent tax years, subject to a separate and distinct set of limitations.
The One Big Beautiful Bill Act (OBBBA) of 2025 has ended the debate over the future of § 461(l). It is now a permanent fixture of the tax code. However, significant areas of uncertainty persist due to a lack of definitive guidance from the IRS on issues like the treatment of gain on the sale of pass-through interests and the interaction with other carryovers.
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