The Excess Business Loss (EBL) Limitation is a tax rule designed to limit the amount of business losses that non-corporate taxpayers can use to offset non-business income, such as wages or investment returns. Introduced as part of the 2017 Tax Cuts and Jobs Act (TCJA), this limitation prevents taxpayers from significantly reducing their taxable income using large business losses.

However, this limitation does not apply to income generated from a business. If your income is classified as business income, you can fully offset it with business losses without being restricted by the EBL limitation.

For 2025, the EBL limits are:

• Single Filers: $313,000
• Married Filing Jointly: $626,000

Any business loss exceeding these amounts cannot be deducted in the current tax year to offset non-business income. Instead, the excess is carried forward as a Net Operating Loss (NOL) to be applied in future years.

What Types of Income Fall Under the Excess Business Loss (EBL) Limitation?

Understanding the distinction between business income and non-business income is crucial when navigating the EBL Limitation, as this primarily applies to offsetting non-business income. Here’s how these two categories are defined:

Business Income

Business income refers to earnings generated from a trade or business activity. This income is generally considered self-generated and includes:

Non-Business Income

Non-business income is unrelated to any trade or business activity and typically consists of passive or investment-derived earnings. Examples include:

How Does the Excess Business Loss (EBL) Limitation Work?

Background:

Jill, a single filer residing in New York, earns a $500,000 from her salary (W2-Income). In 2025, she will invest $400,000 in an oil and gas drilling project, with 90% of her investment ($360,000) qualifying as Intangible Drilling Costs (IDCs). These IDCs are fully deductible as a business loss in the first year.

Current Tax Scenario Without the Oil and Gas Deduction:

• W-2 Income: $500,000
• Federal Marginal Tax Rate: 37%
• New York State Marginal Tax Rate: 10.9%
• Total Tax Liability:
  • Federal: $185,000
  • State: $54,500
  • Total Taxes Without Deduction: $239,500
• Oil and Gas investment: $400,000
• IDC Deduction: $360,000

Step-by-Step Analysis with the EBL Limitation:

1. Step 1: Determine the Maximum Loss Allowed Under EBL Jill can offset up to $313,000 of her $360,000 business loss against her W-2 income in 2025, as per the single-filer EBL limit.
2. Step 2: Calculate Taxable Income After EBL Limit
   • W-2 Income: $500,000
   • Allowed Business Loss: -$313,000
   • Taxable Income After EBL: $187,000
3. Step 3: Calculate Taxes with the EBL Limitation
   • Federal Tax (on $187,000): ~$69,190
   • State Tax (on $187,000): ~$20,383
   • Total Taxes with EBL: $89,573
4. Step 4: Carry Forward the Excess Loss The remaining $47,000 ($360,000 – $313,000) is carried forward as a Net Operating Loss (NOL). Jill can apply this NOL to offset future taxable income.

Tax Savings :

• Taxes Without Deduction: $239,500
• Taxes With Deduction (EBL Applied): $89,573
• Immediate Tax Savings in 2025: $149,927
• Additional Future Savings (via NOL): ~$20,000 (assuming the same tax rates for the carryforward deduction).

Impact of EBL Removal (Hypothetical Scenario):

If Jill’s $500,000 income was entirely from her own business/ or profits from a partnership, the Excess Business Loss limitation would not apply. This is because business losses can fully offset business income. Here’s how her tax situation would look:

• Business Income: $500,000
• IDC Deduction: -$360,000
• Taxable Income Without EBL: $140,000
• Federal Tax (on $140,000): ~$51,800
• State Tax (on $140,000): ~$15,260
• Total Taxes Without EBL: $67,060

Conclusion

The Excess Business Loss (EBL) Limitation is an important consideration for individuals investing in tax-advantaged opportunities such as oil and gas drilling and solar projects. Both investment types often generate substantial upfront deductions using depreciation, which can help offset taxable income. However, the EBL limitation restricts how much of these losses can offset non-business income, such as wages or investment returns, in a given year.

To maximize your tax benefits and avoid surprises, it’s essential to carefully estimate your potential losses and how they interact with the EBL limitation, especially when planning your investment amounts. If you’re unsure how these rules apply to your specific situation or need help aligning your investments with your broader financial goals, talk to us—we’re here to help. Our team of experts can guide you through the complexities of tax planning, ensuring you make the most of these opportunities. Schedule a consultation today and let us simplify the process for you.

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