New Tax Law Enacts Restrictions on Net Operating Losses and Business Losses

by James Kohles, CPA/Principal | RINA

There are a few surprises in the Tax Cuts and Jobs Act of 2018 (TCJA) that you wouldn’t expect from the title and most of the very publicized provisions therein. There are some significant provisions that do not cut taxes but increase them for noncorporate taxpayers. If you happen to have a trade or business that incurs a loss during 2018 that exceeds $500,000 for a married couple or $250,000 for single taxpayers, you will not be able to deduct that excess in 2018. This is true for all trades or business losses whether they are active or passive. That is not a tax cut and may catch many unaware particularly if they are taking advantage of bonus depreciation or other accelerated methods which can generate significant losses. Unfortunately for some pass-through taxpayers, those that are partners in partnerships or stockholders in S Corporations, the decision to use those accelerated methods to generate losses may not be under their control. This will result in some negative tax results and perhaps some disagreements among the various owners. The limited losses do carry forward to future tax years, but they will be subject to the same limitations in future years that apply in 2018 so if you have a business in the development stage or that generates a lot of bonus depreciation, you may be limited for some time.

In addition to the above loss limitations, there is also a limitation on Net Operating Losses (NOL). The NOL deduction will be limited to 80% of taxable income beginning in 2018 and there is no longer a two-year carryback provision unless you happen to be in the farming business. Non- farmers that incur losses could see their tax benefits sharply reduced and carried forward to a year where business losses are again limited to the above referenced $500,000 or $250,000 limits. If you do have the misfortune of incurring a substantial loss in this or any future year through 2026, your ability to take advantage of tax savings to offset that loss are very much limited by the new TCJA. This would not have been the assumption when reading the title of this new law, however, sometimes the devil is in the details.

Compounding tax planning complexity even further, California has not yet adopted the above limitations on trade or business losses, or the NOL provisions. If you have questions regarding this article, please contact your RINA representative.

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James Kohles, CPA, Principal