199A Deduction Losses From Qualified Trade or Business Activities
Specific IRS rules apply to taking the 199A deduction when you've experienced losses from qualified trade or business activities.
Single Activity
Where there is only a single activity qualifying for the 199A deduction and that activity has a loss, the QBI from that activity is zero, and the loss is carried over to the subsequent year’s 199A computation.
Multiple Activities All Negative QBI
Where there are multiple business activities and the QBI from each is negative, the QBI is zero and the negative QBI for each is separately carried over and is used to determine the QBI of each activity in the subsequent year.
Multiple Activities But Net QBI is Positive
When there are multiple activities involved and one or more have negative QBI, but the total QBI from all activities is positive, the QBI for the positive QBI activities is proportionally reduced by the negative QBI before computing the 199A deduction, and the ones that were negative will have no 199A deduction and no carryover.
The reason for the allocation is that some businesses in the group may be SSTBs and the 199A deduction may be subject to phase-out while other businesses may be subject to the wage limitation, which will limit the 199A differently for each activity.
The proposed regulations make it clear that these QBI carryovers and adjustment have no effect on the gain or loss computations or passive loss carryovers for the regular tax computation. They are figured separately without regard to the Sec 199A computations.
Previously Suspended Losses
Several sections of the Code, including:
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465, At-Risk Limitation
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469, Passive Loss Limitations
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704(d), Partnership Losses in Excess of Basis, and
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1366(d), Shareholder Losses in Excess of Basis
provide carryover losses to subsequent years. For purposes of the 199A deduction to the extent that any previously disallowed losses or deductions are allowed in the taxable year, they are treated as items attributable to the trade or business. These losses are to be used in order from the oldest to the most recent on a first-in, first-out (FIFO) basis. However, losses or deductions that were disallowed for taxable years beginning before January 1, 2018, are not taken into account for purposes of computing QBI in a later taxable year. (Reg. Sec 1.199A-3(b)(1)(iv)) The instructions for IRS Forms 8995 and 8995-A each include a QBI Loss Tracking Worksheet for tracking losses or deductions suspended by other code provisions.
Example #17 – Previously Suspended Losses - John is preparing his 2023 tax return. He has a rental activity that qualifies for the 199A deduction. John also has a $17,000 passive loss carryover from 2022 for that rental. In 2023 John’s rental shows a $12,000 loss.
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Tax Computation - For regular tax purposes John’s net passive loss for 2023 is $29,000 ($17,000 + $12,000). John’s AGI for the year is less than $100,000, so he is entitled to claim a $25,000 rental loss and has a passive loss carryover of $4,000 to 2024.
Possible Unexpected Outcome
Since most rentals are qualified trades or businesses for purposes of Sec 199A, and because of substantial depreciation, many of these rentals will be producing negative QBI. Where a taxpayer has positive QBI from other qualified businesses, the negative QBI will reduce the 199A deduction for those other businesses, something the taxpayer may not have been expecting. Claiming the 199A deduction is not an option if the taxpayer qualifies. IRC Sec 199A(a): “Allowance of deduction - In the case of taxpayer other than a corporation, there shall be allowed as a deduction…” and “shall” means the deduction is mandatory if qualified to claim it.