Running a business comes with plenty of ups and downs. While nobody sets out to lose money, a bad year doesn’t have to be a total wash. The tax code allows you to use those losses to offset other income, which can lower your overall tax bill.
However, the IRS has specific limits on how much you can claim at once. For the 2026 tax year, two terms you’ll want to understand are Excess Business Loss (EBL) and Net Operating Loss (NOL). Here is a straightforward breakdown of how they work and what has changed.
1. The Cap on Business Losses (EBL)
You might think that if your business loses $600,000 and you have $600,000 in other income (like stocks or a spouse’s salary), you could just zero out your taxes. Unfortunately, it doesn’t work that way.
The IRS sets a “threshold” for how much business loss you can use to offset non-business income. For 2026, those limits are:
- $256,000 for individuals
- $512,000 for married couples filing jointly
If your total business losses go beyond these numbers, the “excess” amount is disallowed for the current year. But it isn’t gone forever—it just moves to a different category for the future.
2. How it Hits Pass-Through Entities
If you run an LLC, a partnership, or an S Corporation, these rules don’t apply to the company itself. Instead, the limits happen at the individual level. Each partner or shareholder looks at their specific share of the business income or loss and applies the $256,000/$512,000 threshold to their own personal tax return.
3. What Happens to the “Leftover” Loss? (NOL)
When a loss is disallowed because it hit the EBL limit, it turns into a Net Operating Loss (NOL).
Think of an NOL as a “tax credit” for the future. While you can no longer carry these losses back to previous years to get a refund on past taxes, you can carry them forward indefinitely. They sit on your records until you have a profitable year, at which point you can use them to soak up some of that income.
4. The 80% Rule
There is one catch when you finally go to use your carryforward losses: you can’t use them to wipe out your entire tax bill in a future year. You are limited to offsetting 80% of your taxable income.
For example, if you have a $100,000 NOL carryforward and you make $100,000 in profit next year, you can only use $80,000 of your loss. You’ll still pay tax on the remaining $20,000, and the last $20,000 of your loss will carry forward to the year after that.
5. Why Precision Matters
Calculating a Net Operating Loss is notoriously tricky. You have to “add back” certain deductions—like personal exemptions or non-business capital losses—to find the actual figure the IRS cares about. Getting the math wrong now can lead to a real headache (and potential penalties) three or four years down the road when you try to claim the deduction.
Get the Full 2026 Loss Limitation Guide
Business losses are complicated, but they are also a valuable tool for managing your long-term tax liability. Planning how to handle these losses now can save you a fortune in future profitable years.
Want to see the math in action? Download our complete PDF guide on Excess Business Losses and NOLs for 2026. It includes detailed examples and a step-by-step look at the calculation process.
[Download the 2026 Excess Business Loss & NOL Guide (PDF)]
Are you looking at a significant loss this year and aren’t sure how it will impact your 2026 return? Reach out to us. We can help you map out a strategy to make the most of your carryforwards.
