TAX TIP TUESDAY

EXCESS BUSINESS LOSSES AND THE NEW NET OPERATING LOSS RULES

By Phylicia Buie, MST 2/5/2019 12:00 PM EST

The IRS changed a lot of of rules with the 2018 tax reform Tax Cuts and Jobs Act (TCJA). It’s all tax people can talk about. Bear with us, we haven’t had anything this exciting happen in the tax world since the conviction of Al Capone back in the 30s! We’re hoping the more you know, the less scary these new changes will be for you in the long run. So, take a quick scroll through this week’s tax tip as we dive into the changes impacting business losses and their NOLs.

EXCESS BUSINESS LOSSES

NEW RULE: LOSSES LIMITED TO $250K ($500K FOR MARRIED FILERS)

IRS definition:

An excess business loss is the amount by which the total deductions from all trades or businesses exceed a taxpayer’s total gross income and gains from those trades or businesses, plus $250,000, or $500,000 for a joint return.

Ha – that was helpful right! So, what does that even mean? Put simply, if you incur a business loss from a business type other than a C corporation (i.e. you are a sole proprietor, partner or S corporation shareholder), then your loss may be limited. The remainder of that limited loss (now called an excess business loss) is then treated as a net operating loss to be used in future years. Oh and don’t forget – no more NOL carrybacks, we’ll get into that next.

To illustrate how this works let’s assume a single taxpayer has the following income sources for 2018:


Under the new rules, the taxpayer would end up reporting income of $75,000 before other deductions ($300,000 wage + $25,000 capital gains – $250,000 business loss.) Under the old rules, this same taxpayer would have had no income to report because the loss would have completely offset their income. Not the outcome most business owners would expect, so plan ahead to avoid nasty surprises like this on Tax Day.

NET OPERATING LOSSES

NEW RULE: NO CARRYBACK ALLOWED AND THERE’S A 80% LIMITATION

New tax reform also changed the rules for carrying back and carrying forward Net Operating Losses (NOL). Beginning in 2018, NOL’s are no longer allowed to be carried back 2 years. The NOL is instead allowed to be carried forward indefinitely with a small caveat – the NOL is limited to 80% of your taxable income in that future year.

To illustrate how this works let’s start with the net operating loss from the example above and apply it to 2019 for that same taxpayer:


In this scenario, the taxpayer would still have taxable income of $40,000 even though in the past that NOL carryforward would have wiped out their income.

Planning Tip: Keep in mind, the old rules still apply for all years prior to 2018. Did you have an NOL in 2017 and didn’t carry it back? You may have an opportunity to recoup some of that loss if you file before April 15th.


Let us help you stay on top of your taxes this season! Book an appointment with us today to see if you can take advantage of prior year NOL’s or select your tax package and get ahead of any limitation affecting your business losses for 2018.

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