The Tax Cuts and Jobs Act made changes to how net operating losses and business losses are treated. If your business activity will generate a loss in any tax year, or you think you might have a net operating loss in any tax year, these changes could affect your tax liability. Read the article to see what these changes are and how they could affect you.
Net Operating Losses
The Tax Cuts and Jobs Act changed the way a net operating loss (NOL) works for 2018 and tax years beyond. Prior to 2018, if you had a NOL, you could carry it back up to 2 years in order to offset prior years’ income or you could carry it forward for up to 20 years to offset future income. Under the Tax Cuts and Jobs Act, you can no longer carry back losses but you are now allowed to carry them forward indefinitely.
Importantly, the Tax Cuts and Jobs Act also limits the amount of taxable income that can be offset with an NOL that arises in a tax year after 2017 to 80% of taxable income. NOLs that originated in 2017 or a prior tax year can still be used to offset up to 100% of taxable income after 2017. If you have an NOL that occurs during or after 2018, you can only use it to offset up to 80% of the next year’s taxable income and any excess must be carried forward to a future tax year.
Excess Business Losses
The Tax Cuts and Jobs Act created a new limitation on business losses. Aggregate business losses are now limited to $500,000 for married taxpayers filing jointly and $250,000 for all other taxpayers. Losses that exceed the limitation become net operating losses (NOLs) that carryforward to offset taxable income in future years.
This limitation works by adding together all of your business income and losses (which includes your wages) to calculate your aggregate business income. If you have a business loss that is less than the applicable limitation ($500,000 MFJ or $250,000 for all other taxpayers) the excess business loss limitation has no impact on you. If your business loss exceeds the limits, the maximum amount of taxable income that can be offset in the current year with your business loss is the applicable limitation ($500,000 for MFJ or $250,000 for all other taxpayers.) Any excess amounts are carried forward to the next tax year as a net operating loss (NOL). Whether the portion of an NOL attributable to an excess business loss is retested against these limits in subsequent years is uncertain—further guidance from Treasury and IRS is needed on this point.
The tax laws and strategies surrounding the new limitations on excess business losses and net operating losses are complex and deserve careful consideration. If you have questions about these changes or believe that your business could benefit from tax strategies surrounding these changes, feel free to contact our office at (858) 558-9200.