Brief Insights | Strategies to Overcome Pass-Through Loss Limitations in 2020

In this recent installment of Brief Insights, we sit down with Doeren Mayhew Michigan tax advisor, John Burns, as he discusses strategies businesses can take to overcome pass-through loss limitations during these turbulent times. Check out our video to gain insight into how the current environment impacts pass-through losses, ideas to reduce pass-through liabilities and more.

How the COVID-19 Pandemic Affects Pass-Through Loss Limitations

Prior to the TCJA, the environment for pass-through deductions was easier, but still had hurdles of its own that still exist today. These include:

• Basis limitations
• At-risk limitations
• Passive-activity losses

After the Tax Cuts and Jobs Act (TCJA), there were additional restrictions with business losses from pass-throughs. For example, an excess business loss allowance that limited shareholders to $250,000 or $500,000 for those married filing jointly. Additionally, losses were previously allowed to be carried back (net operating losses) for two years and carried forward for 20 years. The TCJA eliminated the carried-back provisions and only allowed for losses to be carried forward. These losses were only allowed to be used on a carried-forward basis to offset 80% of income.

In the wake of the pandemic, the Coronavirus Aid, Relief, and Economic Security (CARES) Act was passed which created additional flexibility and deductibility for business owners in the pass-through form. Prior to the CARES Act, losses could no longer be carried back but that restriction was updated, allowing losses incurred from 2018, 2019 and 2020 to be carried back up to five years. This allows taxpayers access to refunds of tax they had paid in the past. The excess loss limitation was also removed, which previously restricted the amount business owners could deduct in the current year relating to their pass-through.

Tips to Reduce Pass-Through Liabilities

Moving forward, we want to make sure we capture as many losses as possible in 2020 because, unless there is an act from Congress, we’ll return to the more restrictive regime of the TCJA. Watch our video for specific tax strategies to reduce your pass-through liabilities.

If you need assistance in reducing your pass-through liabilities, contact Doeren Mayhew’s Michigan tax advisors today.