IRS issues guidance on excess business loss limitations and NOLs

An IRS office building in East Harlem
An IRS office building in the East Harlem neighborhood of New York

The IRS has issued guidance on excess business loss limitations and net operating losses following changes post-reform.

The Tax Cuts and Jobs Act modified existing tax law by limiting losses from all types of business for non-corporate taxpayers. An excess business loss is the amount by which the total deductions from all trades or businesses exceed a taxpayer’s total gross income and gains from those trades or businesses, plus $250,000 ($500,000 for a joint return).

Excess business losses that are disallowed are treated as a net operating loss carryover to the following taxable year. More information is available here.

The TCJA also modified net operating loss rules. Most taxpayers no longer have the option to carry back a NOL; for most taxpayers, NOLs arising in tax years ending after 2017 can only be carried forward. Exceptions apply to certain farming losses and NOLs of insurance companies other than a life insurance company.

For losses arising in taxable years beginning after Dec. 31, 2017, the new law limits the NOL deduction to 80% of taxable income. More on NOL guidance is available here.

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