Figure 4-Excess Business Losses
Under pre-Tax Cuts and Jobs Act law, if a non-corporate taxpayer received any applicable subsidy for any tax year, the taxpayer’s excess farm loss wasn’t allowed. The amount of losses that could be claimed by an individual, estate, trust or partnership were limited to a threshold amount if the taxpayer had received an applicable subsidy.
The Tax Cuts and Jobs Act provides that, for a tax year of a taxpayer other than a corporation beginning after 12.31.17 and before 1.1.16, the limitation on excess farm loss for non-corporate taxpayers doesn’t apply. Instead, the taxpayer’s excess business loss, if any, for the tax year is disallowed. Thus, for tax years beginning after 12.31.17 and before 1.1.26, excess business losses of a taxpayer other than a corporation are not allowed for the tax year. This applies to the excess business loss of sole proprietorships, partnerships, S corporations, LLCs, estates, and trusts.
An “excess business loss” is the excess, if any, of the taxpayer’s aggregate deductions for the tax year that are attributable to trades or businesses of the taxpayer, over the sum of (1) the taxpayer’s aggregate gross income or gain for the tax year which is attributable to those trades or businesses, plus $250,000 (200% of that amount for a joint return (i.e., $500,000).
When determining whether a taxpayer has an excess business loss, it applies to the aggregate income and deductions from all of a taxpayer’s trades or businesses.
This provision limits the ability of non-corporate taxpayers to use trade or business losses against other sources of income (such as salaries, fees, interest, dividends and capital gains). The result is that the business losses of a non-corporate taxpayer for a tax year can offset no more than $500,000 MFJ, or $250,000 single, of a taxpayer’s non-business income for that year.
Any loss that is disallowed as an excess business loss is treated as an NOL carryover to the following tax year. Under the Tax Cuts and Jobs Act, NOL carryovers are generally allowed for a tax year up to the lesser of the carryover amount or 80% of taxable income determined without regard to the deduction for NOLs. For partnerships and S corporations the excess business loss limitation rules apply at the partner or shareholder level.