Expansion of Allowed Losses for Non-Corporate Taxpayers

(Excess business loss restrictions are suspended)

As part of 2017’s Tax Cuts and Jobs Act (TCJA), Congress added an additional loss limitation for taxpayers other than C Corporations. Section 461(l) provides that the amount of “net business loss” an individual or trust may use in a year to offset other sources of income is capped at $250,000 if single ($500,000 if married filing jointly). Any excess loss is converted into a net operating loss.

The CARES Act suspends Section 461(l) for tax years beginning prior to January 1, 2021 (tax years 2018, 2019, and 2020 for calendar year taxpayers). Taxpayers who reported a loss limited by this provision in 2018 or 2019 can file an amended return to claim a refund or increase their net operating loss available for carryback. (As discussed in a related piece, certain carrybacks are now allowed again as a result of the CARES Act.)

When Section 461(l) becomes effective again (for tax year beginning after January 1, 2021) the CARES Act modifies the calculation to exclude wages from business income. For some taxpayers, this will at that time cause more losses to be limited than otherwise would have been the case.

The technical corrections do not address whether the taxpayer can look through a partnership or S corporation interest to include the associated business capital gains or losses on a sale of a business interest. Additional guidance is needed to clarify this.

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Disclaimer of Liability: This publication is intended to provide general information to our clients and friends. It does not constitute accounting, tax, investment, or legal advice; nor is it intended to convey a thorough treatment of the subject matter.

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