Businesses Face Challenges of New Limits to Excess Business and Net Operating Losses by John G. Ebenger, CPA
Posted on March 22, 2019 by John Ebenger
Two provisions of the Tax Cuts and Jobs Act (TCJA) are throwing some business owners for a loop as they prepare to file their federal income tax returns for 2018. The new law introduced a limit on the deductions that non-corporate taxpayers could claim for excess business losses while also limiting deductions for net operating loss (NOLs) carryforwards and repealing the use of NOL carrybacks. In addition, taxpayers should note that they must apply the at-risk limits and passive activity loss (PAL) rules under the old Tax Code before calculating the amount of any excess business loss.
An excess business loss is the amount by which the total deductions attributable to all of your trades or businesses exceed your total gross income and gains attributable to those trades or businesses plus $250,000 (or $500,000 in the case of a joint return).
Under the TCJA, taxpayers that are not structured as C Corporations may not deduct excess business losses in the current year. Instead, they can treat the disallowed deduction as a 2018 NOL carryforward that they may now use indefinitely to offset only 80 percent of a business’s future taxable income, according to the new NOL rules, which also prohibit taxpayers from carrying back NOLs that arise in tax years after Dec. 31, 2017. Exceptions apply for certain farming businesses and insurance companies, other than life insurance companies.
Despite Congress’s efforts to simplify the Tax Code, the new law can actually mean more work for taxpayers. For example, businesses will need to adjust carryovers from prior tax years to conform to the excess business loss limitations, and real estate professionals will need to apply the passive activity loss rules before calculating their business losses. In addition, taxpayers will need to carefully consider the scope of their income-generating activities and potentially implement new strategies to minimize the negative impact of these limitations and possible reduce their losses in 2018 and in future years.
The professional advisors and accountants with Berkowitz Pollack Brant have decades of experienced helping individuals and businesses across the globe implement tax-efficient strategies that comply with evolving tax policies.
About the Author: John G. Ebenger, CPA, is a director of Real Estate Tax Services with Berkowitz Pollack Brant, where he works closely with developers, landholders, investment funds and other real estate professionals, as well as high-net-worth entrepreneurs with complex holdings. He can be reached at the CPA firm’s Boca Raton, Fla., office at (561) 361-2000 or via email at firstname.lastname@example.org.