TAX YEAR

2021
Excess Business Loss and
Net Operating Loss (NOL)

Save $
And Experience
The Difference
+1-516-464-7444
info@cpaclinics.com
www.cpaclinics.com

Excess Business Loss Limitation Net Operating Loss (NOL)

Your overall business losses may be limited as you cannot A net operating loss (NOL) generally means the amount by
deduct an excess business loss in the current year. An ex- which your business deductions exceed gross income.
cess business loss is the amount by which your total deduc- An individual, estate, or trust may have an NOL if deduc-
tions from all of your trades or businesses are more than tions for the year exceed income. NOLs are caused by loss-
your gross income or gains from all of your trades or busi- es from the following:
nesses, plus a threshold amount. For 2021, the threshold • Trade or businesses (Schedules C and F losses, or Sched-
amount is $262,000 ($524,000 if Married Filing Jointly). Any ule K-1 losses from partnerships or S corporations),
disallowed excess business loss is treated as a net operating • Casualty and theft losses (whether personal or business),
loss (NOL) carryforward, subject to the NOL rules. See How and
to Use an NOL, next column. • Rental property (Schedule E).
Example: George has $500,000 of gross income and $800,000 of
deductions from his retail furniture business. His excess business Individual NOL
loss is $38,000 [$800,000 – ($500,000 + $262,000)]. George must An individual may have an NOL if adjusted gross income
treat his excess business loss of $38,000 as an NOL carryforward (AGI) minus the standard deduction or itemized deduc-
to 2022. tions is a negative amount, and the negative amount is due
to business deductions exceeding business income.
Pass-Through Entities
For pass-through entities (partnerships and S corpora- Estate or Trust NOL
tions), the excess loss limit applies at the partner and share- An estate or trust may have an NOL if the taxable income
holder level. Each partner’s or shareholder’s share of the line on Form 1041, U.S. Income Tax Return for Estates and
items of income, gain, deduction, or loss of the partner- Trusts, is a negative amount, and the negative amount is due
ship or S corporation is taken into account by the partner or to business deductions exceeding business income.
shareholder in applying the excess business loss limitation.
How to Use an NOL
Passive Activity Loss Rules Once the NOL has been calculated for the tax year, the
The excess business loss limit is applied after the passive NOL deduction is limited to 80% of taxable income and
loss rules. Under the passive activity rules, losses and ex- may not be carried back to any previous year. The remain-
penses attributable to passive activities may only be de- ing NOL is carried forward to the following year. If not used
ducted from passive activities. Generally, passive activities up in that year, it continues to be carried forward until it is
are those in which you may own an interest in the business, used up. For farming loss NOLs, the default rule is to car-
but does not materially participate. Some activities are con- ry the NOL back two years, but an election may be made to
sidered passive by default, such as rental activities. waive the carryback period.
 How to Calculate an NOL Carryforward
Excess Business Loss The NOL that is more than 80% of taxable income for the
and Net Operating year is an NOL carryforward. Certain modifications must
Loss (NOL) be made to taxable income to determine how much NOL
will be used up in that year and how much may be carried
NOL Carryback and Carryforward over to the next tax year. The carryforward is the excess of
Default rule. The NOL deduction is limited to 80% of tax- the NOL deduction over modified taxable income for the
able income (taxable income for the year in which it is car- carryback or carryforward year. If the NOL deduction in-
ried forward to, determined without regard to the NOL de- cludes more than one NOL, apply the NOLs against mod-
duction), which means an NOL cannot completely zero ified taxable income in the same order they were incurred,
out taxable income. This 80% limitation does not apply to a starting with the earliest.
property and casualty insurance company. Additionally, if an NOL consists of both a farming loss and
Note: When computing your NOL, the 20% qualified busi- a non-farming loss, the losses should be treated separately
ness income deduction (QBID) is not taken into account. and the farming loss is treated as a separate NOL and taken
into account only after the non-farming NOL is applied.
Carryback. Generally, the option to carry back an NOL is
disallowed. Exceptions apply to certain farming losses and
NOLs of nonlife insurance companies.
Exception: Farming loss. A farming loss is the smaller of
the NOL for the tax year or the NOL computed consider-
ing only farming income and deductions, and has a 2-year
carryback. An election may be made to waive the carryback
period.
Note: NOLs arising in tax year 2021 are limited by the ex-
cess business loss limitation rule, so the NOL carryback
will not exceed $262,000 ($524,000 for joint returns).
Exception: Property and casualty insurance companies.
Applies to insurance companies other than a life insurance
company, and an NOL has a 2-year carryback period. An
election may be made to waive the carryback period.
Carryforward. In general, an NOL carryforward is adjust-
ed to take into account the 80% of taxable income limitation
and may be carried forward indefinitely (until used up).
Exception: Property and casualty insurance companies.
An NOL carryforward is limited to 20 years and the 80%
limitation does not apply.
Where to report the NOL in a carryback or carryfor-
ward year. The NOL deduction is listed as a negative num-
ber as Other Income on Form 1040, with a statement at-
tached that shows how the NOL deduction was comput- Contact Us
ed. If more than one NOL is deducted in the same year, the There are many events that occur during the year that can affect
your tax situation. Preparation of your tax return involves sum-
statement must cover each NOL. marizing transactions and events that occurred during the prior
year. In most situations, treatment is firmly established at the
time the transaction occurs. However, negative tax effects can
be avoided by proper planning. Please contact us in advance
if you have questions about the tax effects of a transaction or
event, including the following:
• Pension or IRA distributions. • Retirement.
• Significant change in income or • Notice from IRS or other
deductions. revenue department.
• Job change. • Divorce or separation.
This brochure contains general information for taxpayers and • Marriage. • Self-employment.
should not be relied upon as the only source of authority. • Attainment of age 59½ or 72. • Charitable contributions
Taxpayers should seek professional tax advice for more information. • Sale or purchase of a business. of property in excess of
• Sale or purchase of a residence $5,000.
Copyright © 2021 Tax Materials, Inc.
or other real estate.
All Rights Reserved

Powered by TCPDF (www.tcpdf.org)