The IRS issued a news release (IR-2018-254) that states it gives additional information on the excess business loss rules of IRC §461(l) and net operating losses given the changes made in the Tax Cuts and Jobs Act (TCJA).
Unfortunately, the “additional information” is rather limited in this release. With regard to the excess business loss rule of IRC §461(l), the release provides the following:
The TCJA modified existing tax law on excess business losses by limiting losses from all types of business for noncorporate 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, or $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.
See Form 461 and instructions, available soon, for details.
The release links to another page that provides some more details on the loss limitation provision:
Noncorporate taxpayers may be subject to excess business loss limitations. The at-risk limits and the passive activity limits are applied before calculating the amount of any excess business loss. An excess business loss is the amount by which the total deductions attributable to all of your trades or businesses exceed your total gross income and gains attributable to those trades or businesses plus $250,000 (or $500,000 in the case of a joint return). A “trade or business” can include, but is not limited to, Schedule F and Schedule C activities, the activity of being an employee, an activity reported on Form 4835, and other business activities reported on Schedule E. Business gains and losses reported on Form 4797 and Form 8949 can be included in the excess business loss calculation. They also include pass-thru income and losses attributable to a trade or business. This includes farming losses from casualty losses or losses by reason of disease or drought. Excess business losses that are disallowed are treated as a net operating loss carryover to the following taxable year. See Form 461 and instructions for details.
While the release promises a final Form 461 “soon”, a draft version was released in August along with instructions. However, that draft form and instructions have left many with questions regarding how this provision will work, including whether an NOL created by this provision in 2018 will have to be tested again as a “business loss” on the 2019 return.
The release provides the following information regarding net operating losses following the changes in TCJA.
TCJA also modified net operating loss (NOL) rules. Most taxpayers no longer have the option to carryback 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.
The page links to a slightly longer description of the net operating loss rules that provides:
Most taxpayers no longer have the option to carryback a net operating loss (NOL). For most taxpayers, NOLs arising in tax years ending after 2017 can only be carried forward. The 2-year carryback rule in effect before 2018, generally, does not apply to NOLs arising in tax years ending after December 31, 2017. Exceptions apply to certain farming losses and NOLs of insurance companies other than a life insurance company. Also, for losses arising in taxable years beginning after Dec. 31, 2017, the net operating loss deduction is limited to 80% of taxable income (determined without regard to the deduction).