Debate: How Should the IRS Treat Excess Business Losses?

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:

Bloink

Byrnes

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.