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Financial Planning > Tax Planning > Tax Reform

Debate: How Should the IRS Treat Excess Business Losses?

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The Inflation Reduction Act will extend the existing limitations on excess business losses of pass-through entities for an additional two years, through 2028.

Under the 2017 tax reform legislation, excess business losses of a non-corporate taxpayer are not allowed during the tax year. These losses are instead treated as part of the taxpayer’s net operating loss carryforward in subsequent tax years.

An “excess business loss” is the excess of aggregate deductions of the taxpayer attributable to trades or businesses of the taxpayer (determined without regard to the limitation of the provision), over the sum of aggregate gross income or gain of the taxpayer plus a threshold amount. The annual threshold amount is $250,000 (or twice the otherwise applicable threshold amount for married taxpayers filing a joint return). 

We asked two professors and authors of ALM’s Tax Facts with opposing political viewpoints to share their opinions about the impact of extending the limitations on excess business losses for two more years.

Below is a summary of the debate that ensued between the two professors.

Their Votes:



Their Reasons:

Bloink: This provision prevents wealthy taxpayers from sheltering their non-business income and avoiding taxes entirely. We need to focus on closing more tax loopholes like this one so that the wealthiest Americans aren’t able to use their business structures to manipulate the system to avoid paying taxes on their income. 

Byrnes: By further extending this limitation, we’re punishing the successful Americans whose investment in their businesses keeps our economy growing and running. Not every tax provision is geared toward raising revenue immediately. Businesses should be entitled to a deduction for their operating losses — just as any business is eligible for typical business expense deductions.


Bloink: Under these new loss limitation provisions, taxpayers remain able to carry forward excess business losses so that they’re getting the fair deductions they deserve — but are unable to manipulate the system by aggregating losses in a single year. We’ve already extended the effective date of the loss limitation provision due to the pandemic. Now that we’re beginning to return to normal, it’s time that we focus on making the ultra-rich pay their fair share.

Byrnes: Sometimes losses are an unavoidable part of running a business. The net operating loss provision recognizes this and allows these taxpayers a fair deduction for their losses. This isn’t a way for wealthy taxpayers to game the system. It’s simply a recognition that business losses should be deductible expenses of running a business — and the NOL deduction should be allowed in full, regardless of the actual entity structure.


Bloink: We have to remember that this excess loss limitation provision limits the amount of business-related deductions that can offset nonbusiness deductions for partnerships and other pass-through entities each year. The rationale is that taxpayers who own businesses shouldn’t be allowed to completely offset their nonbusiness income with the net operating loss deduction — which could effectively allow them to reduce taxable income to zero. 

By extending this provision, we’re recognizing that wealthy Americans shouldn’t be able to game the system by using business structures to avoid paying taxes on non-business income derived from other sources.

Byrnes: Business losses can and do happen regardless of whether a business is operated as a corporation or pass-through entity, like a partnership. Business owners shouldn’t be punished simply because of the organizational structure they’ve chosen for the business. We should be focused on helping American businesses grow and thrive, not forcing them to choose their organizational structure based on arbitrary tax provisions.


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