Small Business Services

Tips on Tax Reform Treatment of Business Losses

Attention business owners! The Tax Cuts and Jobs Act introduced two rules on business losses. One is a new excess business loss limitation. The other is a change in the way taxpayers calculate and claim net operating losses.

What Is the Excess Business Loss Limitation?

The TCJA now limits the business loss deduction that a non-corporate taxpayer may claim in the current year. It is referred to as the excess business loss limitation.

An excess business loss is the amount by which total business deductions exceed total business income and gains plus $250,000 ($500,000 for joint filers).

For example, a single taxpayer with business deductions of $500,000 and business income of $200,000 has an excess business loss of $50,000 ($500,000 deductions – $200,000 income + $250,000). The $50,000 becomes part of the taxpayer’s net operating loss and can be carried over, as explained in the next section.

This means that the taxpayer may deduct only $250,000 of the $300,000 loss, even if the taxpayer has sufficient nonbusiness income to absorb the loss in the current year.

What Were The Rules on Business Losses Before Tax Reform?

Prior to tax reform, a business owner didn’t have an excess business loss limitation. If the taxpayer in the example had sufficient nonbusiness income from other sources to absorb the entire $300,000 loss, the taxpayer could deduct it all in the current year. The limitation means the taxpayer may potentially deduct only $250,000 of the $300,000 loss.

Who Does the Excess Business Loss Limitation Apply To?

The excess business loss limitation may apply to sole proprietorships, non-corporate farms, and pass-through businesses such as S corporations and partnerships.

What Form Is the Excess Business Loss Limitation Calculated On?

The excess loss is calculated on the new Form 461 Limitation on Business Losses.

What About Net Operating Losses (NOLs)?

Prior Net Operating Loss Rules: Before tax reform, taxpayers could generally carry an NOL back two years to offset income and potentially claim a refund. If the NOL wasn’t completely absorbed, the taxpayer could carry it forward up to 20 years.

New Law: There are two new changes:

1 – Most taxpayers no longer have the carryback option. However, NOLs may be carried forward indefinitely.

2 – The NOL deduction in carry-forward years is limited to 80% of the taxpayer’s taxable income, without regard to the NOL itself. Note that any excess business loss is included in the NOL, as explained earlier.

When Do The Changes Go Into Effect?

Both provisions are effective for tax years ending after December 31, 2017 (for the calendar year taxpayers, starting January 1, 2018).

For more guidance on small business tax guidance, find an advisor match.

Insights Icon

Get Matched Today

Find Your Advisor