What Does the Tax Cuts and Jobs Act Mean for Small Business Losses?

Everyone is scrambling to figure out how the Tax Cuts and Jobs Act (TCJA) will affect the amount of taxes they have to pay. The sweeping changes impact not only personal income tax, but also businesses. In addition to getting rid of the corporate alternative minimum tax (AMT), lowering the corporate income tax and giving a deduction to people who own pass-through entities, the Act did away with a lot of tax breaks, and many of the changes only last a few years. Our small business lawyers talk about what the TCJA mean for small business losses.

Limits on Business Net Operating Losses Under the Tax Cuts and Jobs Act

If you have business net operating losses (NOLS) after December 31, 2017, you can only use them to offset taxable income by 80 percent instead of the previous maximum of 100 percent. Also, with the exception of some farming losses, you can no longer use your NOLs for a previous year, but you can carry them forward indefinitely to use in future years. Of course, the word “indefinitely” does not mean the same thing when it comes to taxes as it does in the rest of the universe.

Deductions for Excess Business Losses

Non-corporate taxpayers who sustain excess business losses that are larger than the threshold may see some of their losses disallowed under the TCJA. They might, however, be able to carry the losses forward to future tax years and then deduct them, using the NOLs rules. Certain farming losses, on the other hand, can be carried back for up to two years. You must also apply the rules on passive activity losses to excess business losses. This change applies to tax years beginning after December 31, 2017, and it sunsets on December 31, 2025.

But not so fast. If you do not have at least $500,000 in income from sources that are not trades or businesses, the new excess business loss rule does not apply to you. You can fly right under its radar.

How Loss Carryovers Work

After you lump together all the qualified business income the taxpayer has from all her qualified trades or businesses during the year, if the net amount is a loss, she can carry that loss forward into the subsequent tax year to reduce that year’s qualified business income. This provision does not apply to income, losses, or deductions related to certain kinds of investments, for example, dividends, dividend equivalents, capital gains or losses, or interest income that you cannot link to a trade or business.

Understanding Qualified Business Income Under the Tax Cuts and Jobs Act (TCJA)

You arrive at the amount of qualified business income by subtracting deductions and losses from income and gains. These items must satisfy the Act’s requirements to be qualified items. They must also be related to the taxpayer’s qualified trade or business. You cannot include any reasonable compensation the taxpayer receives from an S corporation or any payments the trade or business makes to a partner. Only after satisfying these rubrics can something be a qualified item of income, gain, loss, or deduction under the TCJA.

It will take time for people to get used to the changes set forth in the TCJA.  Contact the Law Office of Carey Thompson today to develop a tax-savings strategy for your business.