Previously, Code §461(l)(1) disallowed the deduction of “excess business losses” by non-corporate taxpayers (i.e., an individual on Form 1040) for tax years beginning after Dec. 31, 2017, and ending before Jan. 1, 2026.
Example: A single taxpayer has $300,000 of interest and dividends, $500,000 ordinary loss (e.g., K-1, Box 1 T/B loss) from a partnership and $100,000 of ordinary income (e.g., K-1, Box 1 T/B income) from an S Corp with material participation in both business activities. Under pre-TCJA rules, this would result in a $100,000 taxable loss for the taxpayer ($300,000 – $500,000 + $100,000).
But, under the new rules, the two “business interests” are first combined to get an overall loss of $400,000, which is then limited to $250,000 under the Code §461(l) EBL limitations which can be used to offset the $300,000 of nonbusiness (i.e., dividend and interest) income for a net positive income of $50,000.
Example: (cont’d.) This calculation of the EBL would be included on Form 461, Limitation on Business Losses, which is attached to the taxpayer’s 1040 Form. The disallowed $150,000 loss, which is the excess of the $400,000 of business and other income over the new limitation $250,000 for a single taxpayer in this example, is not permanently lost but is instead carried forward as a net operating loss (NOL).
But the CARES Act temporarily modifies the loss limitation for non-corporate taxpayers so they can deduct “excess business losses” arising in 2018, 2019, and 2020.
In other words, the CARES Act postpones the effective date for Code §461(l) “excess business losses” retroactively from tax years beginning after Dec. 31, 2017, to tax years beginning after Dec. 31, 2020.
For purposes of the Sec. 199A deduction, any “excess business deductions” (EBLs) remaining after application of Code §461(l) under the “old” law would have offset a taxpayer’s “qualified business income” (QBI), if any, in the subsequent tax year.
Now, at least for 2018, 2019, and 2020, this will not be the case.
In fact, any taxpayers impacted by the “excess loss limitation” for 2018 should now consider filing an amended tax return.
Dr. John Connors, JD, CPA, LLM
Tax Educator’s Network, Inc.
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