U.S. Excess Business Loss Limitation Introduction
Based on TCJA and CARES
On December 22, 2017, the Tax Cuts and Jobs Act (TCJA) was enacted in the United States to limits excess business losses for non-corporate taxpayers for tax years beginning after December 31, 2017, and before January 1, 2026.
TCJA was limits excess business losses for noncorporate taxpayers. Excess business loss is disallowed as a deduction. The loss amount that is disallowed is the aggregate of all trade or business deductions/losses over gross income/gains from such trades or businesses, less a threshold of $250,000 (or $500,000 if married filing jointly; it will be annually adjusted for inflation). Losses exceeding the threshold amount are currently non-deductible, subject to the Net Operating Loss (NOL) carry-forward rule, which allows indefinitely to be carried forward to subsequent tax years, the NOL that can be utilized in any given year is limited to 80 percent of taxable income. References to "trade or business" above refer to activities whose main purpose is to earn income or profits and to participate in a continuous and regular manner.
The Coronavirus Aid, Relief, and Economic Security Act (CARES Act) of 2020 retroactively suspended these rules for the 2018, 2019, and 2020 tax years, with some technical corrections. The specific provisions are further elaborated on in point III below.
- Applicable objects of US Excess business loss limitation
The provision applies to essentially all taxpayers other than C corporations. Includes Individuals, Sole proprietorships, Partners in a partnership and Shareholders in an S corporation.
For partnerships or S corporations, the excess business loss limitation rules apply at the partner or shareholder level, after each partner or shareholder has been allocated his or her share of income, loss, gain, or deduction. In addition, the provision may apply to some trusts.
- Treatment of losses exceeding threshold in the US
The TCJA modified the treatment of NOL. Prior to the TCJA, taxpayers could carry back an NOL for two years or carry it forward for 20 years. However, after the TCJA, taxpayers are prohibited from carrying back the NOL (except for farming businesses), but they may carry forward the NOL indefinitely. Also, for NOLs incurred after January 1, 2018, the taxpayer may only use 80 percent of the NOL to offset taxable income for a given year, with the remainder carried forward (This rule is applicable beginning with the 2021 tax year.).
- Impact of the CARES Act on excess business loss limits in the US
(1)
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The CARES Act retroactively delayed TCAJ effective date
The excess business loss limitations were originally enacted as part of the TCJA in 2017 and applied beginning with the 2018 tax year, the CARES Act retroactively delayed their effective date.
Under the CARES Act, the excess business loss limitations do not apply to tax years 2018, 2019, or 2020; instead, they become effective in tax year 2021. The TCJA’s net operating loss (NOL) limitations were also retroactively delayed under the CARES Act. Losses generated in tax years 2018, 2019, and 2020 can still be carried back and NOLs carried forward to these years are not subject to the 80 percent limitation.
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(2)
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The CARES Act made technical corrections to the calculation of the excess business loss (applicable beginning with the 2021 tax year)
(a) Clarification that performing services as an employee (e.g., W-2 wages) are not business income for purposes of the excess business loss limitation.
(b) Deductions under ?72 and ?99A are not taken into account in determining the amount of a taxpayer’s deductions.
(c) Net capital gains (but not losses) attributable to a trade or business are taken into account when calculating excess business loss but they will be limited to the taxpayer’s overall capital gain net income.
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- TCAJ effective again in the US
From 2021 the TCAJ will be effective again, and TCJA will be limits excess business losses for noncorporate taxpayers, with individual taxpayers able to deduct losses limited to $250,000 or $500,000 if married filing jointly (it will be annually adjusted for inflation). When a taxpayer incurs a loss, the NOL can carry forward to subsequent years indefinitely. however, the NOL that can be utilized in any given year is limited to 80 percent of taxable income. |
