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For Taxpayers Who Haven't Filed Their 2017 Income Tax Returns: Losses & the TCJA

Recent tax reform will impact businesses, large and small. This piece focuses on considerations regarding the impact of the change on business losses.

How does the TCJA impact net operating losses?

A taxpayer can choose to carry a 2017 net operating losses (NOLs) back to 2015 or forward to 2018. For the 2018 tax year, a taxpayer must carry NOLs forward, but the Tax Cuts and Jobs Act (TCJA) applies limitations. The law limits pass-through entities to $500,000 in losses for married filing jointly and $250,000 for single filers.

C-corporations also have new tax limits. The law limits NOLs incurred after December 31, 2017 to 80 percent of the taxable income of the year in question. C-corps can carry forward NOLs indefinitely, but the ability to carry NOLs back is lost in 2018. The indefinite time period is a change from previous law, which limited taxpayer to a 20 year carry forward period.

What about excess business losses?

The TCJA has also changed the way the United States Internal Revenue Service (IRS) handles excess business losses. Essentially, IRC Section 461(l) provides all businesses except for C-corporations will face limitations on business losses that can be claimed for a taxable year. A recent publication from Spidell's California Tax Letter explains the law defines "excess business losses" as the "excess of the aggregate of all the taxpayer's trade or business deductions or losses over aggregate gross revenues or gain, plus a threshold amount." The law sets the threshold amount for 2018 at $250,000 for single returns and $500,000 for joint.

These are just two of the many considerations regarding taxes and business losses to take into account when reviewing your business' tax planning strategy in light of the new tax reform. Businesses can still take advantage of the rules for 2017 if they act promptly, before the extended 2017 return deadline passes.

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