The One Big Beautiful Bill Act (“OBBBA”) opened up new opportunities for QSBS planning (as our last blog covered). From a business entity standpoint, a large portion of the OBBBA was extending and tweaking some of the most popular changes from the 2017 Tax Cuts and Jobs Act (“TCJA”).
The Remix No One Wanted – Excess Business Losses
We’ll start with the bad news first – the limitation on excess business losses (EBLs) was made permanent – under the TCJA the limitation was set to expire in 2028.
What Is an Excess Business Loss?
In simple terms, an excess business loss is when a non-C corporation taxpayer’s business deductions exceed the taxpayer’s business income by more than a certain threshold in a given tax year. The IRS doesn’t allow you to deduct unlimited business losses against your other types of income (like wages, interest, or capital gains). Instead, under Section 461(l) of the Code, those losses are capped — and anything over the limit becomes an excess that’s treated differently.
2025 EBL Thresholds
For tax year 2025, the thresholds are:
- $500,000 for a joint return
- $250,000 for all other filers
However, under the OBBBA, these numbers will be indexed for inflation for tax years beginning after December 31 2025. So, if you’re a single taxpayer and your businesses generate a $500,000 net loss, you can only deduct $250,000 this year. The remaining $250,000 is classified as an excess business loss.
What Happens to the Excess?
Good news: The excess isn’t lost forever. It converts into a net operating loss (NOL) and carries forward to future years. You can apply it against up to 80% of taxable income in those years. But remember — you’ll need to track it separately, and it doesn’t reduce your income dollar-for-dollar like it would have before the TCJA.
A Remix for the Discerning Audience – Business Interest Expense Limitation
At first glance, this extension and amendment of the limitation on deducting business interest expenses may seem like a snooze (at best), but we promise it’s a sleeper hit.
What Is the Business Interest Expense Limitation?
Under Section 163(j) of the Code, businesses can generally deduct interest expense only up to 30% of their adjusted taxable income (“ATI”). Anything above that? It’s disallowed for the year and carried forward indefinitely. This rule was a huge headliner in the TCJA, and applies broadly to third party debt (including from banks) and even related party loans.
Not Everyone Gets It
You may be exempt from this limitation if:
- You have average annual gross receipts under $30 million for tax year 2025 (though it’s adjusted annually for inflation),
- You’re a real property trade or business that makes an election out of the limit (which is beyond the scope of this blog),
- Or you’re in certain regulated utility businesses.
If you don’t meet these exceptions, the limit applies — no matter your entity type (partnerships, C corporations, S Corporations, etc.).
How the 30% Limit Works
Here’s the formula currently in place thanks to the TCJA:
Deductible Business Interest Expense ≤ 30% of ATI + business interest income + floor plan financing interest
“ATI” is currently limited to earnings before interest and tax under the TCJA. However, after December 31, 2025, the OBBBA lets taxpayers run this calculation as 30% of EBITDA, adding back depreciation and amortization to the calculation (which phased out in the original TCJA). Many businesses in the manufacturing sector or other asset-heavy businesses will see a bump in their interest deduction as a result of this change. There are other changes the carve out certain non-US income and add back certain interest that would otherwise be required to be capitalized as well. Generally, tax practitioners view these changes as helpful to domestic businesses.
This One’s for the Pass-Throughs
A true ballad for the people (small business owners, that is) – the qualified business income (“QBI”) deduction was added as Section 199A of the Code in the TCJA.
We’ve mentioned QBI before. In short, if you qualify, this rule allows you to deduct up to 20% of QBI off the top of your taxable income from your pass-through business (this deduction is not available for businesses run through C corporations).
The Remix
The OBBBA extends this deduction permanently – the TCJA had the QBI deduction sunsetting at the end of 2025. And to top it off – the OBBBA adds a minimum deduction of $400 for taxpayers with at least $1,000 of qualifying income from a qualified trade or business.
While the principle may seem simple, and any small business owner would want to get in on a 20% deduction, the math is complicated. We’re happy to walk you through the calculation to determine if the QBI deduction applies to you.
One Last Hit – The Party Anthem Remix
Even the words “bonus depreciation” sound fun, at least, relatively speaking for a tax term. The TCJA wanted to launch a buying boom by adding Section 168(k) to the Code. This provision allowed for 100% bonus depreciation of new-to-you property that was acquired and placed in service after September 27, 2017 but before January 1, 2023. The TCJA phased out the deduction so that for property placed in service in 2025, that bonus depreciation was only 40%. But the OBBBA boosted that bass and brought back 100% bonus depreciation permanently for property acquired and placed in service after January 19, 2025.
My Deal Closed January 1, 2025…
Unfortunately, the OBBBA is clear that if there is “a written binding contract” in place to acquire property, the property can’t be treated as acquired after the date of that contract. So the 100% bonus depreciation party rocks on, but only for property acquired in a transaction that did not have a binding written contract until January 19, 2025 or later. Property acquired in a deal that signed prior to that is still eligible for the 40% bonus depreciation provided by the TCJA.
Emily Cummins is a federal tax specialist and a member of the Tax practice group at Baker Tax Law. For additional information, please contact emily@mbakertaxlaw.com.