During 2019, Leisel, a single taxpayer, operates a sole proprietorship in which she materially participates. Her proprietorship generates gross income of $142,000 and deductions of $420,000, resulting in a loss of $278,000. The large deductions are due to the acquisition of equipment and the use of immediate expense and additional first-year depreciation to deduct all of the acquisitions. Can Leisel use all of this loss to offset other income she has? She may use $ __ of the $278,000 proprietorship business loss to offset nonbusiness income .Leisel has an excess business loss of $ ___ . The excess business loss is treated as part of her NOL carryforward ___.

Explanation:

She may use $255,000 of 278,000  proprietorship loss to offset non-business income.

The $23,000 excess business loss, the excess business loss is treated as part operating loss carryfoward in subsequent years.

She may use $250, 000 of the $278, 000 proprietorship business loss to offset non-business  

Income. Liesel has an excess of $28, 000. The excess business loss is treated as part of her NOL [Net Operating Loss] and is to carry forward the $28, 000.

Explanation:

She may use $250, 000 of the $278, 000 proprietorship business loss to offset non-business  

Income. Liesel has an excess of $28, 000. The excess business loss is treated as part of her NOL [Net Operating Loss] and is to carry forward the $28, 000.

The Tax Reform Act of 1986, sets limitations on losses when someone is the passive owner of a business entity. However, limitations are now also set for non-passive owners according to the Tax Cuts and Jobs Act of 2017.  

The Tax Cuts and Jobs defines Excess Business Loss as follows:

The aggregate deductions for the year attributable to the taxpayer’s businesses

           Less:    The sum of aggregate gross income or gain of the taxpayer

           Less:    A threshold amount ($500,000 for married taxpayers filing a joint return,

$250,000 for all other taxpayers).

This threshold amounts are adjusted for inflation yearly.  

The purpose of this limitation on business loss is to put a limit on non-business income. Examples of are interest, salaries, dividends and capital gains.

So, of Liesel’s $278, 000 proprietorship loss, only $250, 000 can be used to setoff the non-business income. The balance of $28, 000 is treated as part of her net operating loss. This loss will be carried forward in the subsequent years.  

For years after 2017, the NOLs are limited to 80% of the pre-NOL taxable income. The Net Operating Losses are carried forward indefinitely

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