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Explaining the Expanded Excess Business Loss Rule

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For those unaware, the American Rescue Plan expanded the period for applying the excess business loss rules by one year. Losses that get disallowed under the excess business loss provision are added to the non-corporate taxpayer’s net operating loss (NOL) carryover. 

Apr 19th 2021
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The recent changes the American Rescue Plan (ARP) made to the excess business loss rule was fairly modest, but it does tend to increase the individual’s tax -- atypical of the ARP, which has generally focused on getting funds to individuals and businesses.

In the author’s view, in recent years, we’re seeing some significant deterioration in the basic fairness of the tax rules. The direction of the excess business loss rule as well as new rules generally (soon) limiting the ability to carryback or fully offset net operating losses reflects what seems a new legislative focus on limiting the taxpayer’s ability to offset income with legitimate deductions. 

The tax advisor can hopefully mitigate the potential harshness of these relatively new changes with planning. It may help the planner to keep in mind that we’re dealing with new concepts that can be quite harsh. Let’s begin with a brief review of the net operating loss rules.

The NOL Perspective

The Tax Cuts and Jobs Act (TCJA) was signed into law in December, 2017. It basically provided that NOLs arising after 2017 could only be carried forward. In the author’s view, we need reasonably generous loss carryback and carryforward provisions to avoid harsh, even arbitrary, results that can arise under the annual accounting concept.

The inability to carryback losses poses such anomalies (harsh results) as the following: 

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