Section 70601 – Permanent Extension of IRC §461(l)
For years, savvy business owners and real estate investors have used passthrough losses — from S corporations, partnerships, and rental properties — to reduce their overall taxable income. But starting in 2026, a temporary limit on those deductions will become permanent.
What’s Changing?
The Tax Cuts and Jobs Act (TCJA) introduced a rule called the “Excess Business Loss Limitation” under IRC §461(l). This rule was originally set to expire in 2028. But under the One Big Beautiful Bill, it’s now made permanent — meaning it’s here to stay.
New Law: Section 70601 strikes the expiration date from IRC §461(l), locking in the limitation for all future years.
How the Rule Works
Under §461(l), non-corporate taxpayers (like individuals with S-Corps or rentals) can only deduct business losses up to a certain threshold each year. Any excess loss is carried forward as a net operating loss (NOL) — it doesn’t offset other types of income in the current year.
For 2025 (inflation-adjusted):
$289,000 for single filers
$578,000 for joint filers
Note: These limits adjust annually for inflation.
Example:
Suppose you’re an S-Corp owner with:
A $600,000 business loss from your company
$300,000 in W-2 wages and $200,000 in stock gains
Even though your overall losses exceed your income, you can’t deduct the full $600,000. Only $578,000 (if married filing jointly) counts in 2025. The extra $22,000 must be carried forward.
Who This Affects
S-Corp and partnership owners expecting big losses
Real estate investors with passive or paper losses (e.g. depreciation)
High-income earners using passthrough losses to offset salary or gains
What To Do Now
Don’t assume you’ll get a full deduction for rental or business losses
Revisit projections if your tax plan relies on large passthrough losses
Look into grouping elections or reclassifying income to avoid passive loss treatment
Consider how these rules interact with bonus depreciation, especially on amended returns
Need help calculating your excess business loss or figuring out if your strategy still works? We do this every day for S-Corp owners, landlords, and high-income clients.
Schedule a call, or check out our AI app [Hedgi] — it flags these issues automatically and updates your projections in real-time.