Excess Business Loss Limit 2026: $256,000 and Form 461

The rule, from the statute

Section 461(l)(1)(B) says that “any excess business loss of the taxpayer for the taxable year shall not be allowed.” The excess is defined in 461(l)(3)(A): the taxpayer’s business deductions for the year, computed “without regard to any deduction allowable under section 172 or 199A,” minus the sum of business gross income or gain and a threshold amount. The statute states the threshold as $250,000 and 200 percent of that, $500,000, on a joint return, then indexes it. Section 461(l)(3)(A) also says the excess is “determined without regard to any deductions, gross income, or gains attributable to any trade or business of performing services as an employee.”

Three more provisions matter to a real estate investor. Under 461(l)(2) the disallowed loss “shall be treated as a net operating loss for the taxable year for purposes of determining any net operating loss carryover under section 172(b) for subsequent taxable years.” Under 461(l)(4)(A) the limit is applied “at the partner or shareholder level,” so a fund or LLC never applies it for you. And 461(l)(6) puts it last: “This subsection shall be applied after the application of section 469.”

The One Big Beautiful Bill Act changed two things, and the notes to the statute record both. Section 70601(a) struck the words “and before January 1, 2029,” in 461(l)(1), effective for taxable years beginning after December 31, 2026, so the limit no longer sunsets. Section 70601(b) changed the base year used to index the threshold from 2017 to 2024, effective for taxable years beginning after December 31, 2025. The Instructions for Form 461 (2025) summarize the first change in one line: the law “permanently extended the disallowance of a deduction for excess business losses.”

The threshold, year by year

The IRS publishes the figure each year in its inflation-adjustment revenue procedure. The limit did not apply for 2018, 2019 or 2020: the statute now reads “after December 31, 2020,” and the 2019 figure appears only because Rev. Proc. 2018-57 listed it before the CARES Act moved the start date.

Source: IRS revenue procedures listed in the table, saved October 22, 2026. The amounts are for taxable years beginning in the year shown.

The 2026 number is the first to go down. It is the new statutory $250,000, indexed from 2024, instead of the old $250,000 indexed from 2017: $256,000 is 2.4% above $250,000 (our arithmetic). Anyone who modeled 2026 by rolling the 2025 figure forward is overstating the allowed loss.

What the lower threshold costs at each loss size

Same loss, two thresholds. The excess is the net business loss minus the threshold, never below zero (our arithmetic from the table above).

A loss between $256,000 and $313,000 that was fully deductible for a single filer in 2025 is partly disallowed in 2026; the $300,000 row is that case.

Where the limit sits in the loss order

Four limits can apply to the same loss, and they apply in a fixed sequence. The Instructions for Form 461 (2025) say: “First, apply the at-risk rules; next, apply the passive activity loss rules; and then apply the excess business loss rules.” The Partner’s Instructions for Schedule K-1 (Form 1065) add the first step and list the order as “the basis limitations, the at-risk limitations, the passive activity limitations, and the excess business loss limitations.”

Source: Instructions for Form 461 (2025); Partner’s Instructions for Schedule K-1 (Form 1065) (2025); Publication 925 (2025); 26 U.S.C. 461(l)(6). The carry treatment in the last column is our summary of each form’s instructions.

Publication 925 states the practical consequence for a rental investor: if you have allowable business losses after the basis, at-risk (Form 6198) and passive loss (Form 8582) limitations, “your losses may be subject to the excess business loss limitation.” That is why a passive limited-partner fund loss, which Form 8582 suspends, usually never reaches Form 461. Our guide to Form 8582 and the $25,000 allowance covers that step. The loss that does reach Form 461 is one that is not passive: for example a rental where you qualify as a real estate professional (see our guide to real estate professional status) or a short-term rental you materially participate in (see our short-term rental loophole guide).

Form 461 line by line

Form 461 has 16 lines in three parts and keeps the same layout in the 2025 form and the 2026 draft. Part I collects everything on the return, Part II removes what is not from a trade or business, and Part III applies the threshold.

Source: Instructions for Form 461 (2025) and (2026 draft, dated September 28, 2026); Form 461 (2025) and (2026 draft).

On line 16 the 2026 draft instructions say: “Although it is a loss, you will report the excess business loss adjustment as a positive number on the ‘Other income’ line on your tax return and enter ‘ELA’ on the dotted line.” They add that you will need to “keep a record of your excess business loss from each tax year because it’s treated as an NOL carryover.”

If you own the property through a partnership, the K-1 is the starting point. The Partner’s Instructions for Schedule K-1 (Form 1065) say that under box 20 code AJ the partnership, if it has deductions from a business activity, “it’ll provide a statement showing your distributive share of the aggregate gross income or gain, and aggregate deductions,” which you use with your other items to figure the limit. For a partnership or S corporation the Form 461 instructions say “the trade or business determination is made at that entity’s level.” Our guide to K-1 boxes in real estate funds shows where those statements sit.

Four cases on the 2026 Form 461

All four use the 2026 threshold and the draft form’s lines. Wages are never entered, so we leave them out. Amounts are our arithmetic.

What the cases show. In case B the consulting profit counts because it is business income, so the $150,000 reduces the loss before the threshold applies: $750,000 less $512,000 is $238,000. In case C the stock gain is not from a trade or business; line 10 adds it back and line 13 reverses it, so the result equals case A. In case D line 16 is positive, so there is no adjustment, but a single line (line 5) shows a loss of more than $128,000, which the draft instructions list as a reason to file Form 461 at all.

The IRS draft gives its own check. It states a single filer with “$400,000 of business losses and $50,000 of business income in 2026” has “$94,000 of excess business loss (disallowed).” That is $400,000 minus ($50,000 plus $256,000).

The carryover: an NOL with an 80% cap

The excess business loss does not vanish. The Instructions for Form 172 say the excess “is treated as an NOL to be carried forward” and, “when carryforwards can be used, they can only offset 80% of taxable income in future years.” Section 172(a)(2) writes the cap as 80 percent of taxable income computed without the NOL, 199A and section 250 deductions, and under 172(b)(1)(A)(ii)(II) a loss arising after 2017 carries to “each taxable year following the taxable year of the loss,” with no expiry date.

Using case A’s $144,000 carryover and taxable-income figures we assume, not forecast (our arithmetic):

Because the statute computes the excess “without regard to any deduction allowable under section 172,” the carried NOL is not counted again when you test the next year’s business loss against the threshold. Each new year starts with its own threshold. The Form 172 instructions give a worksheet, “NOL Carryover with an Excess Business Loss Worksheet,” that combines the excess business loss from Form 461 with any ordinary NOL from the same year.

A discrepancy in the IRS’s own example

The Instructions for Form 172 (Rev. December 2024) show an unmarried taxpayer with a $1 million Schedule C loss who “determines that they have incurred an excess business loss of $738,000.” Subtracting gives $262,000, which is the 2021 single threshold in Rev. Proc. 2020-45, not the 2025 figure. At the 2025 single threshold of $313,000 the same loss gives $687,000 (our arithmetic), and at the 2026 threshold $744,000. The instructions do not say which year the example uses, so treat its dollar result as an illustration, not a calculation to copy.

What a reader can do with this

• Find out if you reach Form 461 at all. If your rental or fund losses are passive and Form 8582 suspends them, the limit has nothing to cut. If a rental loss is not passive, it goes through Schedule E line 5 and counts here.
• Run the three-line check before year end. Net business loss (line 14), the 2026 threshold (line 15), and the difference (line 16). For a large cost-segregation or bonus depreciation deduction, see how that deduction interacts with the cap in our guides to bonus depreciation and the cost segregation study.
• Use the 2026 numbers, not last year’s. A spreadsheet carrying $313,000 or $626,000 overstates the 2026 deduction by $57,000 or $114,000.
• Keep an NOL record. The IRS instructions put the burden on you to track each year’s excess business loss; ask your preparer for the Form 172 carryover schedule each year and check that it uses the 80% cap.
• Read the K-1 statement. If a partnership sends a box 20 code AJ statement, give it to your preparer with your other business items; the limit is applied to your whole return, not fund by fund.

This is analysis of public documents, not investment, legal or tax advice. Whether a loss is passive, whether an activity is a trade or business and how the limit interacts with your other items depend on facts only a preparer with your return can check.

FAQ

Sources, read and saved on October 22, 2026: 26 U.S.C. 461 with its amendment notes and 26 U.S.C. 172 (Cornell LII); Rev. Proc. 2018-57, 2020-45, 2021-45, 2022-38, 2023-34, 2024-40 and 2025-32; Instructions for Form 461 (2025) and Form 461 (2025); draft Instructions for Form 461 (2026, dated September 28, 2026) and draft Form 461 (2026); Instructions for Form 172 (Rev. December 2024) and Form 172; Publication 925 (2025); Partner’s Instructions for Schedule K-1 (Form 1065) (2025). Amounts labelled “our arithmetic” are ours and use the assumptions stated beside them.