For noncorporate taxpayers (individuals, estates, trusts, and exempt organizations filing Form 990-T), business losses in excess of the loss limitation threshhold generally cannot be claimed in the year of the loss but must be carried forward as a NOL. Farming losses are an exception, which are either carried back two years or can be carried forward if elected.
The loss limitation threshholds are as follows:
- 2019: $510,000 (MFJ) and $255,000 (all other filers)
- 2018: $500,000 (MFJ) and $250,000 (all other filers)
The excess business loss is calculated on Form 461, Limitation on Business Losses. Underlying the form is the definition of a trade or business, which generally has two aspects:
- The activity is engaged in with a profit motive (even if a profit isn’t earned);
- The activity is engaged in on a regular and continuous basis.
If a return has excess business losses, Form 461 will be produced automatically. The excess loss, if any, will carry to Schedule 1 (Form 1040) Line 8, notated “ELA”.
The form has three parts, and for the purpose of calculating the excess business loss the form automatically pulls into Part I the following income and gain/loss information from elsewhere in the return:
- W-2 wages, salaries, and tips (the IRS considers the activity of being an employee as a “trade or business”; see IRC Sections 172, 179, and 199A);
- Capital gain or loss;
- Gain or loss from Schedules C, E, and F;
- Unemployment compensation.
There are a few lines on the form that may need direct entry. To access Form 461 in Keystone Tax Solutions Pro, from the Main Menu of the tax return (1040, 2019 or later) select:
- Income
- Other Income
- Limitation on Business Losses (461)
Other Income or Losses from a Trade/Business Not Reported – Enter on this line any other trade or business income, gain, or loss included elsewhere in the tax return that hasn’t already been pulled in. This will be added to the other income/loss items in Part I.
Income/Gain Reported Not Attributable to a Trade/Business – Enter on this line the combined income or gain included in Part I that isn’t attributable to a trade or business.
Losses/Deductions Reported Not Attributable to a Trade/Business – Enter on this line the combined losses or deductions included in Part I that aren’t attributable to a trade or business.
Note: For a particular return, losses may be limited by more than one rule in the following order:
- At-risk rules (Form 6198)
- Passive activity loss rules (Form 8582)
- Excess business loss rules (Form 461)
Note: This is a guide on Form 461 in the Keystone Tax Solutions Pro program. This is not intended as tax advice.
Additional Information:
Publication 536, Net Operating Losses (NOLs) for Individuals, Estates, and Trusts