Skip Navigation or Skip to Content

California’s Excess Business Loss Deduction May Be Different Than Federal

This article is reproduced with permission from Spidell Publishing, Inc.

Beginning with the 2019 taxable year, California conforms to the Internal Revenue Code (IRC) Section 461(l) limitation on excess business losses for noncorporate taxpayers with modifications.

Excess Business Loss

For noncorporate taxpayers, an excess business loss for the taxable year is the excess of the aggregate of all of the taxpayer’s trade or business deductions or losses over aggregate gross revenues or gain, plus a threshold amount. The threshold amount for the 2019 taxable year is $255,000 ($510,000 in the case of a joint return).

The excess business loss rules apply after the application of the passive activity loss rules. Therefore, losses suspended in the current tax year under the passive loss rules do not have an effect in the current year. Any prior-year suspended losses that are released in the current year do have an effect in the current year.

California State and Federal Differences

California conforms to the IRS Section 461(l) limitation on excess business losses for noncorporate taxpayers with modifications that:

  • apply the limitation indefinitely: the federal limitation only applies for the 2018 through 2025 taxable years;
  • require that the excess business loss calculation be applied after applying California’s passive loss provision (which ignores real estate professional status and makes modifications for California credits) rather than the federal loss provision; and
  • treat any unused business loss as a “carryover excess business loss” rather a net operating loss (NOL) carryover in the following year. The carryover is required to be included in subsequent years in determining the amount of excess business loss that may be deducted for that year.

As a result of the different carryover treatment, an excess business loss deduction will result in a federal and California difference for any year to which an excess business loss is carried over. This is because federal law will treat an excess business carryover as an NOL carryover, whereas California will add any excess business loss carryover to the excess business loss computation for the year to which it is carried over.


For more information about this article, please contact our tax professionals at or toll free at 844.4WINDES (844.494.6337).
Payments OnlineTaxCaddy
Secure File TransferWindes Portal