May 23, 2018
TCJA May Restrict Deduction Of Losses From Pass-Through Entities
The TCJA Changes Some Rules for Deducting Pass-Through Business Losses
It’s not uncommon for businesses to sometimes generate tax losses. But the losses that can be deducted are limited by tax law in some situations. The Tax Cuts and Jobs Act (TCJA) further restricts the amount of losses that sole proprietors, partners, S corporation shareholders and, typically, limited liability company (LLC) members can currently deduct — beginning in 2018. This could negatively impact owners of start-ups and businesses facing adverse conditions.
Before the TCJA
Under pre-TCJA law, an individual taxpayer’s business losses could usually be fully deducted in the tax year when they arose unless:
The passive activity loss (PAL) rules or some other provision of tax law limited that favorable outcome, or[spacer height=”8px”]
The business loss was so large that it exceeded taxable income from other sources, creating a net operating loss (NOL).
After the TCJA
The TCJA temporarily changes the rules for deducting an individual taxpayer’s business losses. If your pass-through business generates a tax loss for a tax year beginning in 2018 through 2025, you can’t deduct an “excess business loss” in the current year. An excess business loss is the excess of your aggregate business deductions for the tax year over the sum of:
Your aggregate business income and gains for the tax year, and[spacer height=”8px”]
$250,000 ($500,000 if you’re a married taxpayer filing jointly).