This article is part of Inc.'s Ultimate Guide to the New Tax Law for Business Owners
If your business has a loss, whatever the reason, you'll need to address it from a tax perspective. The Tax Cuts and Jobs Act (TCJA) puts a new limit on excess business losses for noncorporate taxpayers. You need to become more tax savvy and make sure you can optimize your tax picture for the current year and into the future.
Here are some basics you'll want to know.
New loss limit
For 2018 through 2025, there is a special loss limitation for noncorporate taxpayers, meaning owners of sole proprietors, partnerships, limited liability companies (LLCs), and S corporations. Generally, business losses that are passed through to these owners can be used to offset other personal income. But if there is an excess business loss, it can't be used currently. Instead, it's treated as a net operating loss (NOL) carryover. This means the NOL is carried forward and can be used to offset 80% of taxable income in future years until it's used up.
An excess business loss is the excess, if any, of:
- The aggregate deductions from an individual's trades or businesses, over
- The sum of (a) aggregate income from these trades or businesses, plus (b) $250,000 if single or $500,000 if married filing jointly. (After 2018, the dollar amounts will be adjusted for inflation.)
For example, a chef whose restaurant is an LLC does $1 million in gross revenue for the year (his aggregate income). The restaurant has deductions of $1.3 million for the year (his aggregate deductions). His NOL carryover is $50,000 ($1.3 million - [$1 million + $250,000]).
There's a new tax form--Form 461--that will be used to figure the limitation.
Strategies for avoiding the limit
It's essential for tax purposes for business owners to monitor closely how the business is performing. This may require working closely with a CPA or other financial adviser to know whether the year is shaping up to be profitable.
If it appears that the company may have a tough year and you may be subject to the new limit, then examine company expenditures for the balance of the year as well as the tax treatment to use for completed and prospective expenditures. For example, if it's projected that you would have an excess business loss, then instead of using the Section 179 deduction ("expensing") or bonus depreciation to write-off the cost of equipment and other qualified property purchases immediately, simply use regular depreciation to spread out deductions and minimize the current business loss.
The economy is doing well, so it might seem out of place to discuss business losses rather than profits. But companies of any size in any industry can have a bad year even in a good economy. Whatever the reason for a loss, it's important to recognize what it means for your taxes to move ahead.