A Quick Look at the Impact of the New Excess Business Losses Rule

By Sherry Fan Grand  |  February 25, 2019

The Tax Cuts and Jobs Act (TCJA) provides us with a new concept – Excess Business Losses (EBL).  Quickly defined, an EBL is the excess of a taxpayer’s aggregated deductions from all trades and businesses over aggregated gross income or gain from such trades and businesses.

The new EBL rule covers losses for non-corporate taxpayers like pass-through entity members, partners, S Corp shareholders as well as Schedule C, Schedule E or Schedule F taxpayers, etc. It only allows these non-corporate taxpayers to deduct business losses in excess of business income up to $250,000 ($500,000 in the case of married filing jointly taxpayers) adjusted for inflation. Importantly, it does not prevent the non-corporate taxpayer from the offsetting losses of one business against income from another business, but it does limit the taxpayer’s ability to offset losses beyond the annual limitation.

Disallowed EBL will be treated under net operating loss (NOL) rules and may be carried forward indefinitely. The NOL rules limit the taxpayer’s ability to deduct carryforward NOL’s to 80% of pre-loss deduction taxable income for any losses arising after December 31, 2017. This provision is effective through December 31, 2025.  

Real estate business owners should continue to pay attention to the old at-risk limitation and passive activity loss rules, because the new EBL rule applies only after these rules are taken into account. For example, if a loss is disallowed under the passive activity rules, it will not be considered an EBL but rather, will retain its character as a passive loss carryforward. This results in an effective individual tax rate of 7.4% in a profitable carryforward year (assuming the highest individual rate of 37%). 

One further note: the annual allowable maximum business loss limitation ($250,000 filing single, $500,000 married filing jointly) under the new EBL rule could negatively impact some business owners, especially owners of start-ups. I would advise that if you anticipate generating business losses, be sure to consider this new and complicated EBL tax rule to determine if there are any adverse effects on your current year taxes as well as those going forward. If you are facing this predicament, please contact your tax advisor.

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About Sherry Fan Grand

Sherry Fan Grand, CPA, is a Partner in the Real Estate Group at Marks Paneth LLP. While focusing extensively on commercial and residential real estate, Ms. Grand also has experience in various industries including hotels, hospitality, architecture, professional services and small business. She works with corporate clients as well as individuals. Ms. Grand has a reputation of assiduously researching proposed tax law changes and projecting how they may be applied for her clients’ benefit. Ms.... READ MORE +

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