This is the third part in our series delving into how laws passed in response to the coronavirus pandemic have impacted tax obligations. The first addressed net operating losses (NOL) and the second discussed real estate qualified improvement property (QIP). This post will analyze how these changes have impacted excess business losses.

In the past, the Tax Code has allowed for business owners to claim deductions for certain business losses. Lawmakers intended these deductions to help businesses to survive financial struggles. Recent tax reform has changed the application of these deductions.

What are excess business losses?

Tax law defines excess business losses as those over $250,000 for an individual or $500,000 for a joint return. The Tax Cuts and Jobs Act (TCJA) included a provision that disallowed these excess business losses. The deduction generally applies to sole proprietorships, partnerships, or S-corporations owned by individuals or trusts.

What has changed?

The Coronavirus Aid, Relief and Economic Security Act (CARES Act) repeals the provision of the TCJA that disallowed this deduction. The change is retroactive through 2018. As a result, business owners may be able to file an amended return and claim this loss — ultimately leading to the return of taxes paid during the applicable year.

Are there any potential risks?

As noted in a recent Bloomberg Tax publication, the repeal is not elective. This means that those who were subject to a limitation from prior years and do not amend their tax returns could face consequences in the future. Namely, the Internal Revenue Service (IRS) could adjust the taxpayer’s loss carryforward downward in future tax years.

Navigating the impact of this change on your returns is complicated. As a result, it is wise to seek legal counsel from those who are familiar with the nuances of these laws. The attorneys at Goldburd McCone have experience with these laws and can advocate for your interests.