February 1, 2018
Last month, President Trump signed into law the much publicized Tax Cut and Jobs Act. In part of our ongoing series discussing the changes made by the Act, the following answers five common questions regarding the new limitation on business losses. This new limitation is unfavorable for those taxpayers it applies to, and was part of the trade-off for the Act lowering tax rates.
1. Who is subject to the limitation?
Any taxpayers other than corporations that are engaged in a trade or business. This includes individuals, sole proprietorships, partnerships, and S corporations.
2. What is the limitation?
A taxpayer can now only claim up to $250,000 ($500,000 for married individuals filing a joint return) of excess business loss in a given tax year. Excess business loss is the amount by which all of the taxpayer’s deductions attributable to his or her trades or businesses exceeds all of the taxpayer’s income or gain attributable to such trades or businesses. Any disallowed excess business loss is carried forward and treated as a net operating loss of the taxpayer.
3. How is the limitation applied for pass-through entities?
The limitation is applied at the partner or S corporation shareholder level.
4. How does the limitation interact with the passive activity rules?
This new limitation joins the gauntlet of rules that partners must satisfy to claim partnership deductions, and applies after the application of the passive activity loss rules of Section 469. A loss that satisfies the requirements of the passive activity loss rules may nonetheless be disallowed under the excess business loss limitation.
5. When does the limitation apply?
The excess business loss limitation applies for taxable years 2018 through 2025.