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Business Loss Cap Is Contrary to New Law’s Stated Purpose

POSTED ON Dec. 4, 2018

A relatively unknown loss cap could wind up leaving job creators with a higher tax bill this year, an outcome which is contrary to the title of the 2017 tax law.

If a tech executive decided to cash out of a successful company and start a new business and hire employees, it would likely lose money in the first few years of operation, Marc Wieder of Anchin Accountants & Advisors said November 30 at the American Institute of CPAs tax planning conference in Washington.

And now because of a new business loss limitation added in the Tax Cuts and Jobs Act (P.L. 115-97), only a small portion of that loss can be used.

“Is that encouraging the executive to keep that business going?” Wieder said. He added that even if a company had been around for 30 years and had loyal employees but continuously lost money, the owner wouldn’t be able to take full advantage of business losses if he kept pumping money into the company.

“This is the Tax Cuts and Jobs Act; there’s ‘jobs’ in the wording,” Wieder said. “What was their thinking in passing this?”

The TCJA change caps excess business losses at $250,000 for individual taxpayers and $500,000 for joint filers. That means taxpayers must first have enough basis to take a loss, then satisfy the at-risk and passive activity rules before having their losses capped under the new loss provision.

One question practitioners want answered is whether that amount over the cap that’s carried forward will be treated as a net operating loss in future years, or whether it will be lumped in with future business loss amounts and applied to the annual cap.

Possible Solution

Wieder said one solution that would encourage job growth would be to allow the disallowed amounts under section 461(l) to qualify as NOLs in that same year. The TCJA also capped NOLs at 80 percent, but permitting the disallowed section 416(l) amounts to qualify as an NOL would still provide some relief.

“If it could be used in the current year and is even limited to 80 percent, it’s going to negate some of that tax burden,” Wieder said. “They’ll get tax from the taxpayer because he could only negate 80 percent of their income, but nobody is focusing on it.”

A draft form released in September is anything but a beacon of clarity, according to Wieder.

“They have made this form so complicated,” Wieder said, adding that it requires taxpayers to pull numbers from all over the tax return to eventually get down to a relevant number.

Wieder said he hopes the IRS changes the form in its final version, but was skeptical of that happening.