Section 461(l) Excess Business Loss Limitations: Calculating and Preparing Form 461, Deficient IRS Guidance

This webinar will provide tax advisers with a practical exploration of the loss limitation rules of Section 461(l). The panel will discuss which items are included or excluded in business loss calculations, the effect of such losses and their carryover to other taxable years, and their interactions with the passive activity loss rules and the Section 199A pass-through business income deduction.

The One Big Beautiful Bill Act made the excess business loss (EBL) limitation rules of Section 461(l) permanent. Although these rules were enacted as part of the Tax Cuts and Jobs Act, unanswered questions remain regarding the application of Section 461(l) requirements and how this legislation interacts with other tax provisions.

The law disallows the current deduction of any EBLs, a statutory creation under Section 461(l). These losses are generally the excess of the taxpayer's aggregate deductions attributable to trades or businesses, less the sum of (1) the taxpayer's aggregate gross income or gain attributable to such trades or businesses and (2) $313,000 ($626,000 in the case of a joint return) for 2025. In other words, net business losses may offset only up to $313,000 or $626,000 investment income and other nonbusiness income.

Significant questions have arisen over whether various tax items are business or nonbusiness for this purpose, such as wages and salaries, gain on the sale of partnership interests or S corporation stock, cancellation of debt income, the Section 199A pass-through business income deduction, and (ironically) certain losses from the disposition of business property.

EBLs are carried forward as a net operating loss (NOL), but there is some debate over how to apply the carryover rules. The NOL can offset only up to 80% of pre-NOL taxable income in the carryover year. Although several technical corrections have been identified for Section 461(l), there remains little official guidance and a scarcity of academic or practitioner commentary on critical issues.

Listen as our experienced panel provides a practical guide to the current state of Section 461(l) as it applies to non-corporate taxpayers.