Under the Act, deductible business losses of non-corporate taxpayers will be limited beginning in 2018. Many have misconstrued this new law to mean that no losses are allowed.
Fortunately, that is not the case. The Act does not allow excess business losses to be deducted. 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. And, over the sum of the taxpayer’s aggregate gross income or gain for the tax year from those trades or businesses, plus $250,000 ($500,000 for a joint return). 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).
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)). In addition, 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. However, the Act did limit NOLs in the future to offset only 80% of a taxpayer’s income for any year.
If you have questions related to excess business loss, contact the experts at Henssler Financial: