While the 2017 Tax Cuts and Jobs Act (TCJA) has created a number of new benefits for real estate businesses, especially as it pertains to Section 179 limits and Bonus Depreciation, it also provided us with Section 461. This new section provides that a taxpayer, other than a C corporation, is not allowed to deduct an “excess business loss.”
This provision is effective for taxable years beginning after December 31, 2017, and before January 1, 2026.
For non C corporation taxpayers, Section 461 only allows a deduction for business losses, in excess of business income, up to $250,000 for individual filers and $500,000 for joint filers for the current taxable year.
Business losses covered by this provision include losses from pass through entities, as well as from Forms Schedule C, Schedule E and Schedule F.
In the case of partnership and S corporation losses, the limitation is applied at the partner or shareholder level. This allows the partner/shareholder to net their business income and deductions for purposes of the limitation.
Calculating Excess Business Loss
The taxpayer takes the sum of all trade and business deductions over total income earned from all trade or businesses. If the net loss is $300,000 for an individual, they can only use $250,000 and must carryover the remaining $50,000.
It should be noted that losses for the purpose of this Section 461 are calculated after the various limitations arising from the Section 465 At-Risk Rules and the Section 469 Passive Activity Rules.
Net Operating Loss
Under Section 461, a non C corporation taxpayer “carries forward” this excess business loss and treats it as part of its net operating loss (NOL) carryforward in succeeding taxable years.
In a different part of the new tax law, a taxpayer’s ability to utilize its NOL is now limited, for losses arising in tax years beginning after 2017, to 80% of taxable income. It also eliminates the carryback of all NOLs arising in a tax year ending after 2017. It does, however, allow such NOL to be carried forward indefinitely.
How MBAF Can Help
This brief alert can only begin to scratch the surface of the full impact that TCJA has had on the accounting complexities now surrounding the reporting of excess business loses for real estate.
The real estate professionals at MBAF have been diligently analyzing the TCJA since its passage. We can not only help you to make sure that your real estate operation is in complete compliance with the new law, but also help you to take every advantage of opportunity to maximize your income, and minimize your tax obligations, that may be presented within the TCJA.
Understanding and compliance with all of the new provisions under the TCJA for real estate investors and operators, can be quite complex. If you would like to benefit from our expertise in these areas, or if you have further questions on this Advisory, do not hesitate to contact our Real Estate Specialists, or call us at 1-800-239-1474.