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Tax Reform Series: Business and Net Operating Losses – Changes for 2018


The December 22 Tax Cuts and Jobs Act contained major tax changes and reform affecting both businesses and individuals. 

For Berntson Porter’s White Paper on the full impact of the new tax legislation, click here.

The following is a summary of the new excess business loss limitation and changes made to the existing net operating losses rules.

Net Operating Losses:

A net operating loss (NOL) is the amount by which a taxpayer’s business losses exceed its income.

For tax years beginning before January 1, 2018, NOLs were able to offset 100% of taxable income. They were allowed to be carried back two years and carried forward for twenty years.

Under the new law, an NOL can offset only 80% of taxable income in any given tax year. Furthermore, NOLs can no longer be carried back, they must be carried forward. The 20-year carryforward period has been replaced with an indefinite carryforward period

NOLs created in tax years beginning before January 1, 2018 are subject to the old rules. Only NOLs generated in tax years beginning after December 31, 2017 are subject to the new rules.

Note there are special rules relating to two-year carrybacks in the case of certain losses incurred by a farming business or other extraordinary circumstances.

Excess Business Losses:

For tax years beginning before January 1, 2018, losses from a non-passive business were allowed to offset other sources of income without restriction.

For tax years beginning January 1, 2018 through December 31, 2025, excess business losses of a taxpayer other than a corporation are not deductible. An “excess business loss” is any net business loss from all activities greater than the threshold amount.

The threshold amount is $250,000 for single filers and $500,000 for married couples filing a joint tax return. This effectively limits the amount of other income a business loss can offset to the threshold amount. Any losses in excess of the threshold amount are then carried forward and treated like an NOL carryforward in subsequent tax years (refer to the new NOL provisions above, limitation applies). The limitation is applied at the partner or shareholder level, not at the flow through entity level, and does not apply to C-Corporations.

This is a new provision of the tax code that has the potential to affect taxpayers in all industries and income levels.

Planning for your Business:

  • Keep an eye out for this when you are selling rental real estate or other passive activities, as suspended passive losses become available during the sale year and may be limited.
  • When dealing with multiple flow-through investments, the taxpayer must aggregate all losses and the limitation is determined on the total net loss.
Your team at Berntson Porter looks forward to working with you on this historic change to our tax system. If you have any questions, please contact your tax professional at Berntson Porter & Company, PLLC at 425-454-7990.