Suspension of excess business loss disallowance

The Tax Cuts and Jobs Act (TCJA, 12/22/2017) disallowed current deductions for excess business losses incurred by individuals and other noncorporate taxpayers beginning in 2018. An excess business loss is one that exceeds $250,000, for single filers, or $500,000 for married filing jointly, adjusted annually for inflation. The Coronavirus Aid, Relief, and Economic Security Act (CARES Act, 3/17/2020) suspends the excess business loss disallowance rule for losses arising in tax years beginning 2018-2020. (Code Sec. 461(I), as amended by the CARES Act)

Although any excess business losses disallowed for tax years 2018-2020 are effectively suspended, the CARES Act did include retroactive technical corrections on how a noncorporate taxpayer's excess business loss should be calculated. The corrections increase the odds a taxpayer may have excess business losses, beginning in 2021-2025, because owners cannot include any income, gains or deductions from performing services as an employee. Also, net capital gains (but not net capital losses) are included in calculating excess business loss. (Code Sec. 461(I)(3)(A) and Code Sec. 461(l)(3)(B), as amended by the CARES Act)  

Amending a 2018 or 2019 return to include the previously disallowed excess business loss disallowance rule could result in a 2018 or 2019 NOL that could be carried back to a prior year for a tax refund.

For additional tax tips and guidance, explore Thomson Reuters resources such as Federal Tax Handbook 2021, Federal Tax Regulations, Winter 2021, and the Complete Internal Revenue Code, Winter 2021.