Tax Strategies & Credits

Tax Reform Puts A Cap On Deducting Business Losses

by
Julie Farless
on
4/26/2018
Tax Reform Puts A Cap On Deducting Business Losses

There has been a tremendous amount of confusion and high level of misunderstanding about the changes brought about by the recent Tax Reform Act. One of the most misconstrued of these changes has to do with deductible business laws for non-corporate taxpayers. Let's take a look at what is really going on. 

Many have expressed concern that as of the tax year 2018, business losses are no longer deductible. This is not correct. What has changed is the deduction of “excess business losses”, which are defined as the overage of the business' combined trade or business deductions subtracted from the combination of their combined gross income or gains from those businesses or trades plus $250,000 (or $500,000 for those filing joint returns). The deductions are determined regardless of whether or not they are disallowed for the tax year, and the amount to be combined with the profit will be adjusted for inflation each year. The bottom line of this complex calculation is that for the tax year 2018, single business owners will be limited to deducting no more than $250,000 per year in losses, while married couples filing jointly will be limited to $500,000.

To see how this calculation would work in real life, a business owner who is single and who operates two separate businesses has an aggregate income from the two of $200,000. His combined deductions total $500,000, which nets out to a $300,000 loss. Before the passage of the new tax law, that is the amount that would have been able to be deducted, but the new changes mean that he has to subtract his $250,000 base deduction amount and his $200,000 total profits from his $500,000 loss, leaving him with an excess business loss of $50,000, which cannot be deducted in 2018. The $50,000 can, however, be labeled as a net operating loss (NOL), which the tax law still permits to be carried forward and deducted from gross income the following year. Though the tax reform act does limit net operating loss deductions to offset only 80 percent of income in a given year, the balance can be carried forward indefinitely until the balance has been exhausted.

If you're finding yourself confused by the new tax law's changes, you're not alone. Don't hesitate to contact an accounting professional to make sure that you are optimizing your financial situation and following all the new rules.

Martinez & Shanken, PLLC writes for TaxBuzz, a tax news and advice website. Reach the firm at [email protected]

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Julie Farless

Julie Farless

Martinez & Shanken, PLLC is a Certified Public Accountant (CPA) firm based in Gilbert, Arizona. We provide a full range of accounting, bookkeeping, consulting, outsourcing and business services, but we specialize in tax preparation. We work with you to ensure that your personal or business processes are conducted in a manner that ensures ongoing integrity in your financial transactions. We are available to answer your questions and help with your ongoing tax planning and changing business needs.

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