Limitations on Excess Business Losses (EBL) for Non-Corporate Taxpayers

Gain insight into the basic structure of Section 461(1) and ordering rules with other loss limitations.

The law formerly known as the Tax Cuts and Jobs Act of 2017 enacted the excess business loss (EBL) limitation rule in new section 461(l), which is expected to raise $150 billion in federal revenues over a decade (more than GILTI, BEAT, or most other widely discussed new tax legislation). Under the new law, net business losses may offset only up to $250,000 or $500,000 of investment income and other nonbusiness income in 2018 through 2025. There is some debate over whether various tax items are business or nonbusiness for this purpose, such as wages and salaries, gain on the sale of partnership interests or S corporation stock, cancellation of debt (COD) income, the Section 199A pass-through business income deduction, and (ironically) certain losses from the disposition of business property. EBLs are carried forward as a net operating loss (NOL) generally to subsequent years. The NOL can offset only up to 80% of pre-NOL taxable income in the carryover year, which may lead to certain planning opportunities. Due to the EBL rules, some taxpayers may find themselves in the surprising situation of having a large amount of taxable income and tax liability, which had been offset by business losses in prior years. Complicating matters are a number of identified technical corrections for the statute and a shortage of official guidance.