Business Losses Limited for the Unincorporated

Unless your business is registered as a Corporation you may be subject to excess business loss limitations. Let that sink in for a while.

In AMERICA you can no longer report losses of more than $250,000 in any given tax year … unless of course your business affairs are incorporated.

This shittiest of the #Stoopid Tax Cut & Jobs Act reporting requirements – IRS Form 461 is but one of many new mind numbing forms. If you don’t believe me, check out line 13 of the form – my personal fav:

“If line 12 is a negative number, enter it here as a positive number. If line 12 is a positive number, enter it here as a negative number.”

IRS Form 461 Line 13

What the ….?!?!

Why must we use the tax code as some sort of social engineering tool?

Clearly the 30 year old tax writers in Washington DC -many of whom have never taken a risk in the entire miserable lives- are profoundly out of touch with middle american dreams to produce this ridiculous legislation and accompanying form. May they all encounter sleepless nights in the depths of the damned!

Job creating risk takes often times loose money in pursuit of a vision, particularly when they are starting out. My most established clients today were also the most glorious losers in the beginning. I love every single one of them because of that.

Generally they all tended to start out small, lacking the resources to properly maintain compliance under our complex set of corporate tax laws. Many were sole proprietors who became partners who eventually formed LLCs – Limited Liability Companies. Then as the business life cycle demonstrated or foresaw traction, a corporation is formed.

Now with this shitty piece of legislation the job creating risk takers of our world will be challenged with more governance in pursuit of that vision. This of course begs the very question – how f’d up is the party in charge – the party of smaller government – justifying this ridiculous new law?

Well, first – here’s how it is supposed to work

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:

The at-risk limits and the passive activity limits are applied before calculating the amount of any excess business loss.

Excess business losses that are disallowed are treated as a net operating loss carryover to the following taxable year purpose of IRS Form 461

IRS Form 461 is a real PITA as it has 8 references to IRS Form 1040 Schedule 1 including:

  1. Taxable refunds, credits, or offsets of state and local income taxes
  2. Alimony received
  3. Business income or (loss) – Attach Schedule C or C-EZ
  4. Capital gain or (loss) – Attach Schedule D if required.
  5. Other gains or (losses) – Attach Form 4797
  6. Rental real estate, royalties, partnerships, S corporations, trusts, etc. Attach Schedule E
  7. Farm income or (loss) – Attach Schedule F
  8. Unemployment compensation

Now, what does the IRS have to say?

  • Non-corporate taxpayers cannot deduct an excess business loss in the current year.
  • The excess business loss is treated as a net operating loss (NOL) carryover.
  • IRS Publication 536, Net Operating Losses (NOLs) for Individuals, Estates, and Trusts, takes a good start at addressing NOL carryovers.
  • You must file Form 461 if you are a noncorporate taxpayer and your net losses from all of your trades or businesses are more than $250,000 ($500,000 for married taxpayers filing a joint return).
  • Attach Form 461 to the applicable tax return you file.
    • Form 1040, U.S. Individual Income Tax Return. •
    • Form 1040NR, U.S. Nonresident Alien Income Tax Return. •
    • Form 1041, U.S. Income Tax Return for Estates and Trusts. •
    • Form 1041-QFT, U.S. Income Tax Return for Qualified Funeral Trusts.
    • Form 1041-N, U.S. Income Tax Return for Electing Alaska Native Settlement Trusts. •
    • Form 990-T, Exempt Organization Business Income Tax Return (and proxy tax under section 6033(e)).
  • An excess business loss is the amount by which the total deductions from your trades or businesses are more than your total gross income or gains from your trades or businesses, plus the threshold amount. The threshold amounts are:
    • For 2018, the threshold amount is $250,000 ($500,000 for married taxpayers filing a joint return).
    • These amounts are indexed for inflation.
  • An activity qualifies as a trade or business if your primary purpose for engaging in the activity is for income or profit and you are involved in the activity with continuity and regularity.
    • The facts and circumstances of each case determine if an activity is a trade or business.
    • The regularity of activities and transactions and the production of income are important elements.
    • You do not need to actually make a profit to be in a trade or business as long as you have a profit motive.
    • However, you do need to make ongoing efforts to further the interests of your business.
  • Ordering Rule applied as follows:
    1. At-risk rules – IRS Form 6198
    2. Passive activity loss rules – IRS Publication 925
    3. Excess business loss rules – IRS Form 461
  • Farming losses.
    • Taxpayers with losses from a farming business must apply the excess business loss limitation before carrying any net operating losses back 2 years.
    • See the Instructions for Form 1045, Application for Tentative Refund. Farming and non-farming losses.
    • If you incur both farming and non-farming business losses that are more than the threshold amount (see Definitions above), you must allocate the threshold amount first to the farming losses to the extent you have an NOL.
    • Transition Rule:
      • If you had losses or deductions that were limited under other provisions of the Internal Revenue Code in prior tax years, including, for example, excess farm losses that were subject to section 461(j) in 2017, those losses or deductions are included in figuring the amount, if any, of your excess business loss in 2018.