As a business owner, you already wear a lot of hats, CEO, marketer, customer service rep, HR manager… the list goes on. So when it comes to taxes, it’s completely understandable if some of the finer details fall to the bottom of your to-do list. But with 2025 just around the corner, there’s one tax rule that’s especially worth paying attention to: the Excess Business Loss (EBL) rule.

This rule could affect how much of your business loss you’re allowed to deduct on your personal tax return and if you’re not prepared, it might throw a wrench into your financial planning.

Let’s break it down in plain English so you can make informed decisions for your business and avoid unpleasant surprises at tax time.

 

First, What Exactly Is the Excess Business Loss Rule?

Let’s say your business has a tough year maybe you made some big investments, ran into unexpected expenses, or dealt with market challenges and you end up with a loss. In the past, you may have been able to use that loss to reduce your taxable income from other sources, like a spouse’s paycheck or capital gains from investments.

But with the Excess Business Loss limitation, there’s now a cap on how much of your business loss you can deduct against non-business income.

This rule was originally introduced as part of the Tax Cuts and Jobs Act (TCJA) and, as of now, it’s been extended through the end of 2028. For the 2025 tax year, the IRS has set the following thresholds:

• $313,000 for single filers

   

• $626,000 for married couples filing jointly

   

   

If your business losses exceed these thresholds, the excess portion can’t be used to offset income this year. Instead, it gets carried forward to future tax years as what’s called a Net Operating Loss (NOL) and even then, it can only be used to offset up to 80% of your taxable income in any given year.

So, in a nutshell: you’re not losing the deduction forever, but you won’t be able to use all of it right away.

 

But Wait — There’s Another Rule to Know: Passive Activity Losses (PAL)

Before the EBL rule even comes into play, you need to clear another hurdle: the Passive Activity Loss (PAL) rules.

These rules apply to business activities in which you’re not materially involved, think rental properties or investments where you’re not working in the day-to-day. If the IRS considers your business to be “passive,” your losses may be disallowed entirely until you either:

• Generate enough passive income to offset them, or

   

• Sell or exit the business activity.

   

   

Only once your losses are deemed non-passive do they move on to be evaluated under the Excess Business Loss rule.

If you’re not sure whether your business qualifies as passive or active, that’s a conversation worth having with your bookkeeper or tax advisor because the classification can make a big difference in your ability to deduct losses.

 

Why This Matters to Your Bottom Line

Now, you might be wondering: “Will this really affect me?”

If your business generates large losses whether due to expansion efforts, downturns in revenue, or high upfront investments, yes, it absolutely could. And even if you’re structured as an S Corporation, Partnership, or LLC, the EBL rule applies. That’s because it’s enforced at the individual taxpayer level, not the entity level.

Here’s a common scenario:

You and your spouse file taxes jointly. You have a business that shows a loss of $750,000 in 2025. Your spouse earns a $200,000 salary, and you also have $100,000 in capital gains. Without the EBL rule, you might think you can deduct the entire business loss from that income.

But under the rule, only $626,000 of that loss can be used in 2025. The remaining $124,000 will have to be carried forward into future years as an NOL and even then, only part of it may be usable each year.

In other words: this rule can significantly delay the tax relief you’re expecting, especially if you’re relying on those losses to lower your tax bill in the short term.

 

How to Plan Around the Rule

We know, this probably isn’t the most exciting topic, but it is one that could impact your cash flow, especially if your business has a cyclical income pattern or you’re going through a major growth phase.

Here are a few ways you can plan around the Excess Business Loss rule:

1. Work Closely With Your Bookkeeper and Tax Professional

   
   Your bookkeeper is your first line of defense in identifying trends and preparing for big-picture tax impacts. If you expect to show a significant loss in the upcoming year, it’s time to map out how that might affect your overall tax situation.

    

2. Explore Entity Structuring Options

   
   In some cases, the way your business is structured (LLC, S corp, etc.) can impact how losses flow through to your personal tax return. This is a great conversation to have with your CPA to see if changes could benefit you.

    

3. Review Your Passive vs. Active Participation

   
   If you’re in a gray area in terms of how much you participate in the business, it’s worth clarifying whether your losses will be considered passive. Documentation and time tracking can help make your case if needed.

    

4. Adjust Expectations for Tax Refunds or Liability

   
   If you were counting on using a big loss to offset other income, prepare for the possibility that your refund may not be as large or your tax bill not as low as you expected.

    

 

Don’t Wait Until Tax Season

The best tax strategies don’t happen in April they happen throughout the year. And with rules like the Excess Business Loss limitation in play, proactive planning is more important than ever.

The good news? You don’t have to navigate all this alone.

As your bookkeeping partner, we’re here to help you understand how these rules apply to your specific situation and make sure you’re as prepared as possible going into 2025.

If you have questions or want to talk about how this might affect your business, reach out anytime. Let’s take the guesswork out of tax planning so you can stay focused on growing your business, not stressing over tax code fine print.