The short answer
A business loss is not always deductible in full in the year it happens. Up to four limits can apply in order: basis, at-risk, passive activity, and — for individuals, estates, and trusts — the excess business loss limit. Which ones apply depends on the taxpayer and on how the business is organized; not every business owner is subject to all four. Amounts those limits disallow are suspended or carried forward. Separately, a net loss that remains for the year can create a net operating loss (NOL). The NOL rules are not another limit on the loss year: they govern how that loss is carried to other years, where the deduction is generally limited to 80% of taxable income.
The order of the limits and NOL treatment
| Step | Rule | Who it applies to | Form | What happens next |
|---|---|---|---|---|
| 1 | Basis | Partners and S corporation shareholders | Form 7203 (S corporation shareholders) | Carried forward indefinitely until you have enough basis |
| 2 | At-risk | Individuals, estates, trusts, and certain closely held corporations | Form 6198 | Treated as a deduction from the same activity in the next year |
| 3 | Passive activity | Individuals, estates, trusts, personal service corporations, and closely held corporations | Form 8582 | Suspended until you have passive income or dispose of your entire interest |
| 4 | Excess business loss | Noncorporate taxpayers only | Form 461 | Treated as an NOL carryover to later years |
| After the limits | NOL treatment (not a fifth limit on the loss year) | Individuals, estates, trusts, and C corporations; partnerships and S corporations generally cannot use an NOL, but their owners use their shares | Form 172 (individuals, estates, and trusts) | The NOL is carried to other years and deducted there, generally subject to the 80% limit |
The IRS instructions for Forms 7203 and 461, and Publication 925, describe this order: basis, then at-risk, then passive activity, then excess business loss.
Which rules apply to which business
| Business type | Basis limit | At-risk and passive activity | Excess business loss | NOL |
|---|---|---|---|---|
| Sole proprietorship (Schedule C) | No separate partner or shareholder basis limit; the owner reports the business directly | Apply to the owner | Applies to the owner | Figured on the owner's individual return (Form 172) |
| Partnership or multi-member LLC | Applies to each partner (basis in the partnership interest) | Apply to each partner, not to the partnership itself | Applies to noncorporate partners; the trade or business determination is made at the partnership level | The partnership generally cannot use an NOL; partners use their shares |
| S corporation | Applies to each shareholder (stock and debt basis, Form 7203) | Apply to each shareholder, not to the corporation itself | Applies to noncorporate shareholders; the trade or business determination is made at the corporation level | The S corporation generally cannot use an NOL; shareholders use their shares |
| C corporation | No pass-through to owners; losses stay in the corporation | At-risk: only certain closely held corporations. Passive activity: only closely held corporations and personal service corporations | Does not apply | The corporation has its own NOL (Form 1120), generally subject to the 80% limit |
Basis: partners and S corporation shareholders
- S corporation shareholders can deduct their share of losses only up to the basis of their stock and of loans they made directly to the corporation. Form 7203 tracks this basis.
- Partners and LLC members taxed as partners can deduct losses only up to the basis of their partnership interest; see partnership and LLC taxes.
- Losses limited by basis are carried forward indefinitely and deducted in a later year when basis allows.
At-risk and passive activity limits
- At-risk: you are generally at risk for the money and the adjusted basis of property you put into the activity, and for amounts you borrowed for it if you are personally liable for repayment. Special rules can treat qualified nonrecourse financing secured by real property as at risk.
- Passive activity: losses from a trade or business in which you do not materially participate, and generally from rental activities, can offset only passive income. Rental real estate has special exceptions; see passive activity loss rules.
The excess business loss limit
| Tax year | Threshold (single and other filers) | Threshold (joint return) | Source |
|---|---|---|---|
| 2025 | $313,000 | $626,000 | Rev. Proc. 2024-40 |
| 2026 | $256,000 | $512,000 | Rev. Proc. 2025-32 |
The limit applies to individuals, estates, and trusts — not C corporations. Your net loss from all trades or businesses, after the earlier limits, is allowed only up to the threshold; the excess is an excess business loss. Wages from working as an employee are not counted as business income for this calculation. The One Big Beautiful Bill Act made this limit permanent. The disallowed amount is not lost: it is treated as an NOL carryover to later years.
Net operating losses
- Figuring the NOL: individuals, estates, and trusts use Form 172. Not every deduction counts — for example, capital losses in excess of capital gains, nonbusiness deductions in excess of nonbusiness income, and the qualified business income deduction are not allowed when figuring an NOL.
- Carryforward: NOLs arising in tax years after 2020 generally can only be carried forward, and they can be carried forward until used up.
- 80% limit: for tax years beginning after 2020, the deduction for NOLs arising after 2017 is generally limited to 80% of taxable income figured without the NOL deduction (and, for individuals, without the qualified business income deduction). NOLs from tax years beginning before 2018 are not subject to the 80% limit.
- Carryback exceptions: farming losses — and losses of certain insurance companies other than life insurance companies — can be carried back 2 years. You can elect to waive the carryback with a statement attached to a timely filed return (including extensions); the election is generally irrevocable.
- Quick refunds: individuals, estates, and trusts can use Form 1045, generally filed within 1 year after the end of the loss year, or Form 1040-X; corporations use Form 1139. A carryback can create alternative minimum tax for the earlier year; see the AMT.
Example (2026, joint return)
A married couple filing jointly has $900,000 of wages and a $700,000 loss from a business in which one spouse materially participates, with enough basis and amount at risk. The loss is not passive.
| Step | Amount |
|---|---|
| Net business loss after basis, at-risk, and passive limits | $700,000 |
| 2026 excess business loss threshold (joint return) | $512,000 |
| Loss allowed in 2026 | $512,000 |
| Excess business loss — carried forward as an NOL | $188,000 |
In 2027, if their taxable income figured without the NOL deduction and the qualified business income deduction is $150,000, the NOL deduction is generally limited to 80% of that amount, or $120,000. The remaining $68,000 carries forward to 2028.
Suspended basis, at-risk, and passive losses and NOL carryforwards each follow different rules for when they can be used. Keep Forms 7203, 6198, 8582, 461, and 172 — or equivalent worksheets — from every year. The IRS says to keep records for an NOL year for 3 years after you have used the carryback or carryforward, or 3 years after the carryforward expires.