New Limitation on Business Losses of Non-Corporate Taxpayers

Tax|Tax Reform

By Joseph Heisler

The Tax Cuts and Jobs Act expanded certain pass-through limitations on losses for non-corporate taxpayers. The new provisions limit the aggregate amount of deduction related to business income generated during the year to $500,000 (filing joint) or $250,000 (filing single), for tax years beginning after December 31, 2017 and before January 1, 2026. Any remaining excess business losses of the taxpayer are treated as part of the taxpayer’s net operating loss (NOL), which is carried forward to subsequent tax years. These NOL carryforwards are allowed to offset 80% of the taxpayer’s income in the following years.

Excess business loss is the excess, if any, of:

  • the taxpayer’s aggregate deductions for the tax year from the taxpayer’s trades or businesses, determined without regard to whether or not such deductions are disallowed for such tax year under the excess business loss limitation; over

the sum of:

  • the taxpayer’s aggregate gross income or gain for the tax year from such trades or businesses, plus
  • $250,000, adjusted annually for inflation after tax years beginning after December 31, 2018 (200% of the $250,000 amount in the case of a joint return)

The above changes can be of particular concern for those that may have intangible drilling costs passed through from an oil and gas investment activity and the inability to utilize the full deduction in the current year. It remains largely unknown and regulations will need to be provided to offer clarity on the interplay between the excess loss deduction limitation and the potential addback for excess intangible drilling costs for the individual alternative minimum tax.

Please visit the Our Thoughts On...Energy and Resources blog for more articles, or contact a Schneider Downs tax advisor if you have any questions.

Material discussed is meant for informational purposes only, and it is not to be construed as investment, tax, or legal advice. Please note that individual situations can vary. Therefore, this information should be relied upon when coordinated with individual professional advice.

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