The Tax Cuts and Jobs Act expands certain 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 are effective for tax years beginning after December 31, 2017, but expire after December 31, 2025.
The above changes will present challenges to companies in the transportation industry. If the company decides to take advantage of the 100% bonus depreciation, would that create a loss for the current year? How will that loss impact the following year when the carryover of the NOL can offset only 80% of the company’s taxable income? Also, the cyclical nature of the transportation industry could cause companies with losses in one year to be limited in using those losses in the following years. Company management will need to make assumptions and prepare an analysis to chart the best course of action as these situations arise.