Tax Cuts and Job Act Caps on Deducting Business Losses
Deducting business losses is just another article in a series that explains how the various tax changes in the GOP’s Tax Cuts & Jobs Act. This series offers strategies that you can employ to reduce your tax liability under the new law.
Under the Act, deductible business losses of noncorporate taxpayers have limits starting in 2018. Many business owners have thought that this new law did not permit losses. Fortunately, that is not the case.
Excess Business Loss
It is true that the Act does not allow the deduction of “excess business losses.” An “excess business loss” is the excess of the taxpayer’s aggregate trade or business deductions for the tax year (determined without regard to whether the deductions are disallowed for that tax year) over the sum of the taxpayer’s aggregate gross income or gain for the tax year from those trades or businesses, plus $250,000 (200% of that amount for a joint return (i.e., $500,000)). This amount will be adjusted for inflation after 2018.
More simply put, deductible losses for the year are generally limited to $250,000 ($500,000 for married couples filing jointly).
Net Operating Losses (NOL) – Computing Loss Limits
Example: A single taxpayer, in 2018, has two businesses. The combined deductions from the two businesses total $500,000. The taxpayer’s gross income from those two businesses is $200,000. After netting the income and deductions, there is a net loss of $300,000 ($200,000 – $500,000). Prior to the Act, the deductible loss would have been $300,000. However, under the Act the excess business loss is equal to $50,000 ($500,000 – ($200,000 + $250,000)). And since excess business losses are not deductible, the taxpayer can only deduct $250,000 ($300,000 – $50,000) in 2018.
On the bright side, the nondeductible excess business loss ($50,000 in our example) is treated as a net operating loss (NOL) carried forward to the next year’s return, where it is deductible from the taxpayer’s gross income, including nonbusiness income. Under the Act, an NOL is carried forward indefinitely until it is used up. The Act did, however, limit NOLs in the future to offsetting only 80% of a taxpayer’s income for any year.
Do you have questions regarding deducting business losses?
If you have questions related to “excess business loss,” please give Alex Franch, BS EA a call at 781.849.7200 or email us at firstname.lastname@example.org. Better yet, if you are a new business or an entrepreneur contemplating starting a business, why not make an appointment to develop a business tax strategy?
Alex Franch, BS EA
Alex is a Tax Specialist and Partner at Joseph Cahill & Associates / WorthTax. He has a diverse background including a Bachelor of Science from Boston College in Mathematics and extensive military service. Alex is an Enrolled Agent and has a decade of tax preparation experience. He is passionate about serving businesses with tax and financial planning strategies.