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The recently passed tax legislation has been touted as “tax simplification,” but taxpayers and advisors have found it to be more like “tax confusion,” and the new code section related to limitation on excess business losses only adds more things to be confused about.
Historically individuals, S corporation shareholders and partners have faced various types of limitations on their ability to deduct losses from their trade or business activities on their individual income tax returns. These limitations could be a result of basis issues, at risk and or passive activity loss limitations, or the incurrence of a net operating loss. With the 2017 tax reform changes Congress has added another limitation to that list by enacting the limitation on excess business losses of non-corporate taxpayers.
For tax years beginning after Dec. 31, 2017 and before Jan. 1, 2026, if a non-corporate taxpayer incurs an excess business loss as defined below, then this loss shall be disallowed and treated as a net operating loss and carryforward to subsequent tax years.
The amount by which the taxpayer’s aggregate deductions attributable to the taxpayer’s trades or businesses exceeds the aggregate gross income and or gains attributable to those trades or businesses plus an additional $ 250,000 (or $ 500,000 for married taxpayers filing on a joint return basis) of hypothetical income for the 2018 tax year.
For partners and S corporation shareholders, the amount of income, gain, deduction or loss used in this calculation is based on the partners or shareholders allocated share of these items as reported to them by the partnership or S corporation.
As mentioned above there are several loss limitation provisions that limit a taxpayer’s ability to utilize a loss in a particular tax year. This code section provides that this limitation is applied after applying the passive loss limitation rules. Depending on the results of that analysis there may or may not be loss available from the taxpayer’s passive activities to be considered in this calculation. We also assume that any basis or at-risk limitations that may be applicable to a taxpayer’s non-passive activities remain applicable and may have an effect of this calculation as well.
To date most commentators have simply reiterated what the code section says as we have above and have not ventured to much further into its calculation or how it may or may not interact with other code sections. For example the qualified business income deduction also has a loss carryforward provision which is entity specific unlike this limitation where entities are aggregated in determining a net operating loss position.
As with many other simplifications made by the Tax Cuts and Jobs Act of 2017, the Section 461(l) loss limitation presents ambiguities and application uncertainties, which will require interpretive guidance from the Internal Revenue Service. However, Doeren Mayhew stands ready to help you better understand this limitation’s intricacies, calculation and impact on you and your business. Contact our tax advisors today.
Want to reach the author? Email George Grzywacz or contact him at 248.244.3415.
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