Cutting of the electrical steel sheets to appropriate shape and size is performed during the manufacturing of electrical machines that leads to the magnetic material deterioration near the cutting edge. Epstein frame measurements of electrical steel samples of different widths cut by laser cutting are carried out in the range of 20-400 Hz frequency of sinusoidal excitations. Two stators one with laser cut and another one with electric discharge wire cutting are manufactured and the effect of cutting on core losses is analyzed. The effect of cutting on the magnetic permeability and core losses are modeled with analytical equations. Furthermore, the model is implemented in the finite-element (FE) simulation of the Epstein frame test setup. The presented loss model is found to reproduce the measurement results reasonably. The loss model is then applied to the simulation of a cage induction machine with time-stepping FE analysis (FEA). A significant increase in core losses was observed both in simulations and measurements due to the effect of laser cutting. The presented cutting model closely follows the measured core losses.