Section 461(l) Excess Business Loss Limitations: Calculating and Preparing Form 461, Deficient IRS Guidance

Description

The Tax Cuts and Jobs Act (TCJA) introduced the excess business loss (EBL) limitation rules of Section 461(l). Originally scheduled to sunset Dec. 31, 2025, along with many other TCJA provisions, and suffering a suspension under the CARES Act for 2018-2020, a combination of extensions under the American Rescue Plan Act and the Inflation Reduction Act moved its expiration date to Dec. 31, 2028. Although extended, there remain unanswered questions concerning applying Section 461(l) requirements and how this legislation interacts with other tax provisions.

The law disallows the current deduction of any EBLs, a statutory creation under Section 461(l). These losses are generally the excess of the taxpayer's aggregate deductions attributable to trades or businesses over the sum of (1) the taxpayer's aggregate gross income or gain attributable to such trades or businesses and (2) $305,000 ($610,000 in the case of a joint return) for 2024. In other words, net business losses may offset only up to $305,000 or $610,000 of investment income and other non-business income.

Significant questions have arisen over whether various tax items are business or non-business for this purpose, such as wages and salaries, gain on the sale of partnership interests or S corporation stock, cancellation of debt (COD) income, the Section 199A pass-through business income deduction, and (ironically) certain losses from the disposition of business property.

EBLs are carried forward as a net operating loss (NOL), but there is some uncertainty and debate over how to apply the carryover rules. The NOL can offset only up to 80 percent of pre-NOL taxable income in the carryover year. Although several identified technical corrections exist for Section 461(l), there is still a lack of official guidance, and a relative scarcity of academic or practitioner commentaries on critical issues.

Listen as our experienced panel provides a practical guide to the current state of Section 461(l) as it applies to non-corporate taxpayers.