Net Operating Losses
Under pre-Tax Cuts and Jobs Act law, a net operating loss (NOL) for any tax year was generally carried back two years, and then carried forward 20 years. Taxpayers could elect to forego the carryback. The entire amount of the NOL for a tax year was carried to the earliest of the tax years to which it may be carried, then carried to the next earliest of those tax years, etc.
New Law: Tax Reform repeals the general two-year NOL carryback and the special carryback provisions, but provides a two-year carryback for certain losses incurred in a farming trade or business. The Act also provides that NOLs may be carried forward indefinitely. There is also a provision that limits the NOL deduction to 80% of taxable income.
Disallowance of Excess Business Losses
Under pre-Tax Cuts and Jobs Act law, if a non-corporate taxpayer received any applicable subsidy for any tax year, the taxpayer’s excess farm loss for the tax year wasn’t allowed. Thus, the amount of losses that could be claimed by an individual, estate, trust, or partnership were limited to a threshold amount if the taxpayer had received an applicable subsidy. For this purpose, an excess farm loss was the excess of the taxpayer’s aggregate deductions that were attributable to farming businesses over the sum of the taxpayer’s aggregate gross income or gain attributable to farming businesses plus a threshold amount. Any excess farm loss was carried over to the next tax year.
New Law: The Tax Cuts and Jobs Act provides that, for a tax year of a taxpayer other than a corporation beginning after Dec. 31, 2017 the limitation on excess farm loss for non-corporate taxpayers under Code Sec. 461(j) doesn’t apply. Thus, for tax years beginning after Dec. 31, 2017 and before Jan. 1, 2026, excess business loss of a taxpayer other than a corporation are not allowed for the tax year. In other words, the Tax Cuts and Jobs Act expands the limitation on excess farming loss to other non-corporate taxpayers engaged in any business. This can apply to the excess business loss of sole proprietorships, partnerships, S corporations, limited liability companies (LLCs), estates, and trusts.
An “excess business loss” is the excess (if any) of the taxpayer’s aggregate deductions for the tax year that are attributable to trades or businesses of the taxpayer, over the sum of: (i) the taxpayer’s aggregate gross income or gain for the tax year which is attributable to those trades or businesses, plus (ii) $250,000 (200% of that amount for a joint return (i.e., $500,000)).
Any loss that is disallowed as an excess business loss is treated as a net operating loss (NOL) carryover to the following tax year. Under the Tax Cuts and Jobs Act, NOL carryovers are generally allowed for a tax year up to the lesser of the carryover amount or 90% (80% for tax years beginning after 2022) of taxable income determined without regard to the deduction for NOLs.
As you can see from this overview, the new law affects many areas of taxation. If you wish to discuss the impact of the law on your particular situation, please give us a call.