Many provisions in the Tax Cuts and Jobs Act received very little press, but may have a significant impact on your tax liability. One such provision is the new excess business loss limitation rules that will affect individual business owners of pass-through entities (i.e. sole proprietors, partnerships, and S-Corporations) beginning on 1/1/2018.
Historically, loss deductibility was dependent on whether the business owner was an active participant or a passive participant. Active participants could deduct current year losses from taxable income and any unused loss was treated as a Net Operating Loss (NOL) that could be carried back two years or forward twenty. Passive participants could deduct losses after applying the Passive Activity Loss rules which limit the deduction of losses from passive activities.
Under the Tax Cuts and Jobs Act, any excess business loss, defined as losses from trade or business activities exceeding $500,000 for married taxpayers filing jointly and $250,000 for all other taxpayers, is treated as part of your net operating loss carryover to the following year. NOL’s are now limited to 80% of taxable income and can be carried forward indefinitely. NOL’s generated subsequent to December 31, 2017 cannot be carried back.
We anticipate the IRS providing additional guidance on how to properly apply these new excess business loss rules. Please contact your Sweeney Conrad professional for help navigating the new laws and planning opportunities at 425.629.1990.