You read that right. It’s entirely possible to have a rough year in business, take a fat loss, and still owe the IRS.
If that sounds backwards, congratulations. You have common sense. But the IRS plays by its own rules. One of those rules is called the Excess Business Loss Limit, and it’s been messing with tax bills in ways most business owners don’t even see coming.
“I Lost Money… So Why Do I Owe Taxes?”
If your business losses go beyond a certain threshold, you don’t get to deduct all of them this year.
For tax year 2025, the Excess Business Loss limits are:
- $289,000 for solo filers
- $578,000 for married couples filing jointly
So, let’s say your business took a $300K hit and you’re filing solo. You’d think you could deduct the whole thing and lighten your tax bill. Nope. You can only deduct $289K.
The remaining $11K gets shoved into next year’s return like forgotten leftovers in the office fridge.
This Rule Hits More People Than You’d Think
Don’t assume this only applies to big corporations with massive losses. We’ve seen this penalty trip up:
- Small business owners
- Real estate investors
- House flippers
- Anyone with one rough or irregular year
All it takes is one large deal falling through, or one calculated risk that didn’t go your way, and boom. You’re over the limit.
The worst part? Most people don’t know this rule exists until it has already cost them.
What You Can Do (Before It Bites You)
There are ways to work around this mess, but they require a little strategy:
Time it right.
Some income and expenses can be shifted between tax years with a little planning. That can help you stay below the limit.
Rethink your setup.
The way your business is structured (S-corp, partnership, sole prop, etc.) can impact how this rule applies. Not all losses are treated the same.
Plan ahead.
Waiting until tax season to deal with this is like waiting until you hit a deer to install headlights. You’ll want to model this out now and plan accordingly.
We’ve had business owners come to us thinking they were about to get a refund, only to find out their deductions hit the Excess Business Loss wall. It’s not fun.
But it’s also avoidable, if you know it’s coming.
Don’t Let the IRS Decide What You Can Write Off
At Solution 8020, we take the mystery out of tax planning. No 200-page puzzles. No jargon storms. Just practical, strategic advice that keeps the IRS off your back.
Want to know if this rule might mess with your return?
Book a quick call. We’ll take a look at your numbers and help you dodge the pain before it hits.
