Inflation Reduction Act extends ‘pass-through’ tax break limits for 2 more years. Here’s what that means for entrepreneurs

Senate Majority Leader Chuck Schumer, D-N.Y., discusses the Inflation Reduction Act on Aug. 7, 2022 in Washington, D.C.

The Inflation Reduction Act was passed by the Senate on Sunday.

Pass-through businesses report their income on their owners' tax returns. The income is taxed at the individual rate. Pass-throughs include partnerships and S-corporations.

Tax experts say Democrats' legislation limits the ability of pass-throughs to write off costs like salaries and interest.

Personal Finance explains how carried interest works and how it benefits high income taxpayers.

There is a limit on excess business losses. The new bill would extend the restriction for another two years, even though it was supposed to end in 2027. The extension was added to the legislation during the negotiation and amendment process.

The inflation reduction act passed along party lines.

The Tax Cuts and Jobs Act contained the pass-through limitation.

Pass-through owners were not allowed to use business losses over $250,000 to offset non- business income. The law sets a $500,000 limit for a married couple to file a joint tax return.

The inflation adjustment will cause the caps to be higher in 2022.

Steve Rosenthal is a senior fellow at the Urban-Brookings Tax Policy Center.

Rosenthal said the provisions hurt "rich guys" who were using business losses to take tax write-offs.

Any pass-through business that loses money every year can theoretically be limited. Real estate businesses, which can use depreciation rules to rack up big losses on paper, are likely among the most affected.

It’s a really big deal for uber-wealthy people with a ton of real estate.

Levine, who is also chief planning officer at Buckingham Wealth Partners, said that it is a big deal for wealthy people with a lot of real estate.

The limitation for pass-throughs was one of the provisions that affected individual taxpayers.

The limit in the American Rescue Plan was extended by Democrats. The committee estimated that the one-year extension would raise about $32 billion.

Rosenthal said that the inflation reduction act extension would raise roughly the same amount of money each year.

Business losses are not always gone forever. If Congress doesn't extend the limitation again, owners might be able to defer the tax benefits.

Rosenthal said that the losses usually get claimed later.