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The Tax Cuts and Jobs Act (TCJA) created a provision, Internal Revenue Code (IRC) Section 461(l) that limited the allowable losses that could be deducted for noncorporate taxpayers to $250,000 for individuals and $500,000 for married filing joint taxpayers. These loss limitations were determined at the partner and shareholder individual level. The At-risk basis and passive activity loss limitations are applied before applying the excess business loss limitations under IRC 461(l).
The Coronavirus Aid, Relief and Economic Security (CARES) Act lifted the excess farm loss limitation for taxpayers other than corporations for tax years beginning after December 31, 2017 and before January 1, 2026. In addition, the CARES Act removes the excess business loss limitation for all other non-corporate taxpayers for tax years beginning prior to January 1, 2021. The loss limitation will expire for tax years beginning after December 31, 2025, as originally drafted in the TCJA.
Previously under TCJA, any excess business loss would carry forward indefinitely under the net operating loss (NOL) rules to offset 80 percent of the taxpayer’s taxable income in the carryforward tax year. The CARES Act has also modified the NOL limitations to allow the reduction of more than 80 percent of taxable income. In addition, the modified NOL rules allow for a five-year carryback of NOL’s generated in the 2018, 2019 or 2020 tax years, with the excess loss eligible to be carried forward under IRC 172. Please see our related article that explains the revised NOL guidance in further detail.
The determination of the excess farm losses will be determined without regard to allowable NOL’s or qualified business income deductions. For all other non-corporate business losses, they shall be determined without regard to any deductions, gross income or gains attributable to any trade or business of performing services as an employee. The CARES Act also includes language that the aggregate deductions of the taxpayer which are attributable to trades or businesses shall not include losses from the sale of capital assets. In addition, the act provides that gains from the sale or exchange of capital assets to be taken into account in the aggregate gross income or gain of the taxpayer for purposes of the limitation ($250,000-Single/$500,000-MFJ) shall not exceed the lesser of capital gain net income determined by only taking into account gains and losses attributable to a trade or business or the taxpayer’s capital gain net income.
The effective date for these provisions shall apply to taxable years after December 31, 2017, thereby providing an opportunity to amend the 2018 or 2019 tax returns that may have been filed with excess business loss limitations.