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By Andrew Gradman, Esq.
Trusted Advisor at AB FinWright LLP (www.abfinwright.com) and Founder at Gradman Tax (www.gradmantax.com)

Accepted for publication in the CEB Real Property Law Reporter; reprinted with permission. The published version will reflect new developments and may contain proofreading and other changes. The author thanks Michael Wiener for comments.

This article is the third of a six-part series titled Real Estate Tax Tips During the Coronavirus Pandemic which describes selected deadline extensions and tax refund opportunities relating to real estate and the coronavirus pandemic.

  1. Introduction and overview of disaster relief provisions
  2. Net Operating Loss (NOL) Carrybacks (IRC §172)
  3. Limitation on Excess Business Losses (IRC §461(l))
  4. Depreciation of Qualified Improvement Property (QIP)
  5. Business Interest Limitation & Method for Amending Returns
  6. Deadlines for Qualified Opportunity Zones (IRC §1400Z-2), Like-Kind Exchanges (IRC §1031), Deadlines for Involuntary Conversion (IRC §1033), Deadlines for Low-Income Housing Tax Credits (LIHTC)

We hope you find these article written by Andrew Gradman very helpful.  As always, please feel free to reach out to our office at (310) 237-3070 for a consultation on how these opportunities and provisions may help you.

Limitation on Excess Business Losses (IRC §461(l))

The TCJA also imposed a new $250,000 limit on excess business losses of noncorporate taxpayers. Excess losses must be carried forward as an NOL.

Like the TCJA’s prohibition on NOL carrybacks, the limitation on excess business losses has proved to be an Achilles heel. As California’s Legislative Analyst’s Office points out, such a limitation “could discourage investment in new or expanded businesses. [W]hen losses cannot be used to offset nonbusiness income, the impact falls more heavily on the business owner.” See The 2019-20 Budget: Tax Conformity at lao.ca.gov. Limiting business losses also runs contrary to the pattern in tax law, which usually discriminates against non-business losses.

To alleviate this, the CARES Act delays the onset of the excess business loss limitation until 2021. It also makes technical corrections to the process for calculating these losses. As amended, the amount of the loss limitation is no longer reduced to reflect NOLs; the §199A deduction; deductions from a trade or business of performing services as an employee; or losses from the sale of capital assets. At the same time, the amount of the limitation is no longer increased to reflect income from such services, or gains from sales of capital assets in excess of capital gain net income. The carveout for capital assets reflects that capital losses generally cannot offset ordinary income (IRC §1211), even when carried forward (IRC §1212). These changes apply retroactively to 2018.

Note that in 2019, California conformed to the TCJA rule, with two exceptions. First, California’s version does not sunset in 2026. Second, the excess business loss does not become an NOL. Instead, it is carried forward as excess business loss, and thus cannot be applied against non-business income. California’s rule remains in place. See Rev & T C §17560.5.