Blog · 16 October 2026

Excess Business Loss Limitation 2026: The §461(l) $256,000/$512,000 Threshold, Form 461 and NOL Carryforwards for US CPA Firms

By Keshav Bansal, CA

The excess business loss limitation got tighter for 2026, not looser. Under §461(l), the threshold for taxable years beginning in 2026 is $256,000, or $512,000 on a joint return, per Rev. Proc. 2025-32. For 2025 it was $313,000 and $626,000. As Karen Yu, CPA, of Astute Advisors pointed out on October 8, 2026, that is $114,000 less loss a married couple can use against wages and investment income this year. For US CPA firms, the work is to rerun year-end loss projections on Form 461 before clients buy equipment or sign off on bonus depreciation.

Why the threshold fell

The One Big Beautiful Bill Act (P.L. 119-21, §70601) made two changes to 26 U.S.C. §461(l). First, it struck the sunset (effective for taxable years beginning after December 31, 2026), so the limitation no longer has an end date. The 2025 Form 461 instructions say OBBBA “permanently extended” the disallowance. Second, for taxable years beginning after December 31, 2025, the statutory $250,000 amount ($500,000 joint, since the law uses 200%) is now indexed by substituting 2024 in the cost-of-living formula. Indexing restarts from a recent base year, so the 2026 figure lands at $256,000 instead of continuing up from $313,000. Rev. Proc. 2025-32, section 4.31, sets the 2026 figures.

How an excess business loss is measured

An excess business loss is the amount by which aggregate deductions attributable to the taxpayer’s trades or businesses exceed aggregate gross income or gain from those businesses plus the threshold. Key points from the statute and the draft 2026 Form 461 instructions (dated September 28, 2026; not for filing):

• Wages are excluded. Deductions, income and gains from the trade or business of performing services as an employee are not counted. A $650,000 W-2 does not raise the cap.
• Capital losses are excluded. Capital gains count only up to the lesser of capital gain net income from the business alone or total capital gain net income.
• NOL and QBI deductions are ignored. Business deductions are measured without §172 or §199A deductions. See our §199A QBI deduction guide for 2026.
• Pass-throughs are tested at the owner level. Partnership and S corporation items are combined on the partner’s or shareholder’s return with Schedule C, Schedule F and other business results.
• Noncorporate taxpayers only. Individuals, estates and trusts are covered; C corporations are not.

The draft instructions give a simple example. A single filer with $400,000 of business losses and $50,000 of business income in 2026 has $400,000 − ($50,000 + $256,000) = $94,000 of excess business loss, which is disallowed for the year.

Ordering: the loss limit comes last

Section 461(l)(6) applies the limitation after §469. The draft 2026 instructions say other limits come first, which may include basis limitations, the at-risk limitations and the passive activity loss limitation. So a K-1 loss is tested for partnership basis and at-risk, then for passive status (see our material participation guide), and only what survives goes on Form 461. The transition rule matters too: losses or deductions limited under other provisions in earlier years are included in figuring the current year’s excess business loss. A previously suspended loss that becomes deductible in 2026 can push a client toward the threshold.

What happens to the disallowed amount

The loss is not lost. Under §461(l)(2), the disallowed loss is treated as a net operating loss for carryover purposes under §172(b). The Instructions for Form 172 (Rev. December 2024) say the excess is carried forward and, when used, can offset only 80% of taxable income in future years. That matches §172(a)(2). For taxable years beginning after 2020, deductions for NOLs arising after 2017 cannot exceed 80% of taxable income computed without the NOL, §199A and §250 deductions. Outside farming losses, there is no carryback.

Mechanically, Form 461 line 16 produces the excess business loss. It goes on the return as a positive “Other income” adjustment, on Schedule 1 (Form 1040) line 8p, labeled “ELA.” Joint filers complete one Form 461 for both spouses, and a Form 461 goes with any applicable amended return. Keep a record of each year’s excess business loss, because it feeds next year’s NOL schedule.

Who has to file Form 461 for 2026

Per the draft 2026 instructions, a noncorporate taxpayer files Form 461 if net losses from all trades or businesses are more than $256,000 ($512,000 joint), or if any one of Form 461 lines 1 through 8 would show a loss of more than $128,000. For 2025 those triggers were $313,000/$626,000 and $156,500.

Same facts, two years

Yu’s example uses a hypothetical joint couple: $650,000 of wages and an $800,000 S corporation loss after basis, at-risk and passive limits, with no other business income. Under 2025 rules, $626,000 is allowed and $174,000 becomes an NOL. Under 2026 rules, $512,000 is allowed and $288,000 carries forward, subject to the 80% cap when used. Astute notes that much of a loss like this often comes from bonus depreciation. In its example the S corporation, not the couple, would make the election out; it covers all property in the chosen class placed in service that year, and revoking it requires IRS consent. Spreading depreciation and carrying an NOL both defer the deduction, but on different schedules, so model both before the entity return is filed.

California runs its own number

According to Astute, California generally does not conform to OBBBA. Its 2025 FTB 3461 threshold matched the federal $313,000/$626,000, and as of October 8, 2026 the FTB had not published a 2026 figure. Astute expects the state number to come in above $512,000 but treats that as an expectation, not a confirmed figure. California also carries the disallowed amount forward as an excess business loss carryover, not an NOL, and does not follow federal bonus depreciation. California clients may need two separate carryover schedules.

Year-end checklist for CPA firms

• Project 2026 business income and losses across Schedule C, Schedule F, Schedule E business activity and every K-1, net of wages and non-business capital items.
• Apply basis, at-risk and passive limits first, including any suspended losses released this year.
• Compare the net loss with $256,000 / $512,000 and the $128,000 single-line filing trigger.
• Coordinate with entity clients on bonus depreciation and other depreciation elections before the partnership or S corporation return is final.
• Track carryforwards on Form 172 at the 80% limit, and separately for California where it applies.

Where Tax Brew fits

Pulling every K-1, Schedule C and suspended-loss schedule into one Form 461 projection takes hours in Q4. Tax Brew provides bookkeeping, cleanup and tax prep support for US CPA firms, with the first 20 hours free for qualifying engagements, while your team keeps the review, advice and sign-off. See our services, or email info@taxbrewglobal.com.

Sources: 26 U.S.C. §461(l) and §172 (Cornell LII); Rev. Proc. 2025-32, §4.31; IRS Instructions for Form 461 (2025) and draft 2026 Instructions for Form 461 (Sept. 28, 2026); Instructions for Form 172 (Rev. December 2024); Karen Yu, CPA, Astute Advisors — Excess Business Loss Limit for 2026 (Oct. 8, 2026). General information, not tax or legal advice.