f your business is anticipating a loss in 2026, you may expect to use that loss to offset income from other sources on your individual tax return. But if you operate as a sole proprietor or a passthrough entity, the excess business loss limitation could prevent you from deducting the full amount currently. The limit has been reduced for 2026, making year-end tax planning especially important this year.
How the limit works
A loss occurs when a business's expenses and other deductions for the year exceed its revenue. Such losses generally can offset a sole proprietor's or pass-through business owner's income from other sources - such as salary, self-employment income, interest, dividends and capital gains - only up to the annual excess business loss limit.
Before applying that limit, you must factor in any other restrictions that may reduce your deductible business loss. These include basis, at-risk and passive activity loss rules.
If you still have a deductible loss after those rules have been applied, the excess business loss limit kicks in. For 2026, the current deduction limit for eligible business losses is $256,000, or $512,000 for married couples filing jointly - down from $313,000 and $626,000, respectively, for 2025. The 2026 amounts will be adjusted for inflation starting in 2027. (If you own multiple businesses, the calculation considers your combined business activities rather than applying a separate limit to each business.)
Any loss disallowed under this rule isn't lost. Instead, it's treated as a net operating loss (NOL) carryover to the following tax year. NOLs generally can be carried forward indefinitely, though the NOL deduction generally can't exceed 80% of taxable income for the year, subject to various exceptions and transition rules.
The limit in action
Suppose you're single and the sole owner of a pass-through business that generates a $600,000 loss in 2026, and you have no income or gains from other businesses. Assume the entire loss is otherwise deductible after applying the relevant basis, at-risk and passive activity loss rules.
Under the excess business loss limitation, you can deduct only $256,000 of the business loss currently. The remaining $344,000 is an excess business loss and is treated as an NOL carryover. So even if you have enough nonbusiness income in 2026 to absorb the entire $600,000 loss, you can't use all of it to reduce your 2026 taxable income. But you'll have an NOL you can deduct from your income in future years until the NOL is used up (subject to the various applicable rules and limits).
Planning before year end
If your business is expecting a substantial loss, consider estimating the impact before December 31. The timing of business income, gains and deductible expenses could affect the amount subject to the limitation. Other tax provisions also may affect your business loss deduction. Contact us to determine how the rules apply to your situation and discuss year-end planning opportunities.