Did you know that the CARES Act temporarily suspends the excess business loss (EBL) restrictions for individuals?

This means that for businesses, net operating losses (NOL) from the 2018, 2019, and 2020 tax years can now be carried back.

Seize the opportunities!

Be sure to utilize the amended return opportunities available for the changes brought by the CARES Act.

If we filed your 2018 and/or 2019 tax returns, your loss carryover summary should be included in your tax returns.

Make sure to review your tax returns for possible favorable amendment you can make, and, of course, we are available to review your returns for you and strategize.

As you know, excess business losses come into play when a noncorporate taxpayer (such as an individual, trusts, or estate that own businesses directly or as partners in a partnership or shareholders in an S corporation) actively participates in a business activity that generates loss. Generally, losses can work to offset other taxable income.

The TCJA limited individuals from using more than $250,000 ($500,000 for married filing jointly (MFJ) taxpayers) of business losses to offset nonbusiness income. Any business loss beyond the limits laid out above was carried over as a Net Operating Loss (NOL).

However, the CARES Act has retroactively postponed the limits so that they now apply to tax years beginning in calendar years 2021 through 2025.

Therefore, the CARES Act removes limitation for tax years 2018, 2019, and 2020, effectively allowing taxpayers who were otherwise disallowed from utilizing all their business losses to do so.

The elimination of the excess business loss restrictions for 2018, 2019, and 2020 helps taxpayers achieve the following objective:

Pay less tax upon filing their 2019 tax returns and allow for refunds for prior tax years.

The postponement means that you may be able to amend:

Any filed 2018 tax returns that reflected a disallowed excess business loss (to allow the loss in 2018) and
Any filed 2019 tax returns that reflect a disallowed 2019 loss and/or a carryover of a disallowed 2018 loss (to allow the 2019 loss and/or eliminate the carryover).

Note that the excess business loss limits also don’t apply to tax years that begin in 2020. Thus, such a 2020 year can be a window to start a business with large up-front-deductible items (for example capital items that can be 100% deducted under bonus depreciation or other provisions) and be able to offset the resulting net losses from the business against investment income or income from employment.

Changes to the excess business loss limits

The CARES Act made several retroactive corrections to the excess business loss rules as they were originally stated in the 2017 TCJA.

Most importantly, the CARES Act clarified that deductions, gross income or gain attributable to employment aren’t taken into account in calculating an excess business loss. This means that excess business losses can’t shelter either net taxable investment income or net taxable employment income. Be aware of that if you’re planning a start-up that will begin to generate, or will still be generating, excess business losses in 2021.

Another change provides that an excess business loss is taken into account in determining any NOL carryover but isn’t automatically carried forward to the next year. And a generally beneficial change states that excess business losses don’t include any deduction under the tax code provisions involving the NOL deduction or the qualified business income deduction that effectively reduces income taxes on many businesses.

And because capital losses of non-corporations can’t offset ordinary income under the NOL rules:

Capital loss deductions aren’t taken into account in computing the excess business loss and
The amount of capital gain taken into account in computing the loss can’t exceed the lesser of capital gain net income from a trade or business or capital gain net income.

Contact us with any questions you have about this or any other tax matters.