Expertise Beyond the Numbers

New Limitations on Excess Business Loss Under the Tax Cuts and Jobs Act

For tax years beginning January 1, 2018, the Tax Cuts and Jobs Act (TCJA) restricts the use of business losses for non-corporate taxpayers. Learn more in the following SC&H Group blog post.

Under prior law, business losses recognized at the individual level -could reduce non-business income after the passive loss rules were applied.

But now, under the TCJA, a non-corporate taxpayer’s “excess business loss” is disallowed.

The Act provides that excess business losses aren’t allowed for the tax year, but are instead carried forward and treated as part of the taxpayer’s net operating loss (NOL) carryforward in subsequent tax years.

A taxpayer has an excess business loss if the taxpayer’s losses from all trades or businesses exceeds income from the trades or businesses by more than $250,000 ($500,000 for taxpayers who file joint returns). The $250,000/$500,000 amount is adjusted for inflation in years after 2018.

The excess business loss limitation is applied after the passive loss rules. This means that if a loss is disallowed under the passive activity loss rules, income and deductions from that activity would not be included in the excess business loss calculation.

As a result, taxpayers who have losses in excess of the thresholds are required to carry those losses forward as an NOL, and will not receive a tax refund related to those losses until they can be used in future years.

It should also be noted that starting in 2018, net operating losses cannot be carried back, and an NOL carryover can only reduce one’s taxable income up to 80% of that amount in future years.

For tax strategy purposes, it may be beneficial to plan around having an excess business loss due to this issue.

Several open questions exist, including how this new section of the Internal Revenue Code will sync to the qualified business income deduction when you have a carryover.

To discuss how these open issues surrounding excess business loss may impact you, or to discuss how we may help you navigate tax planning under the TCJA, please contact us.