Business loss limitation rules are back in play for the tax year 2021. This means that if you have total business losses in excess of $262,000 (unmarried) or $524,000 (married) your deductions will be limited to that threshold even if you are active, at risk, and have sufficient tax basis in the business.

Business losses are the total amount in which your deductions from a trade or business exceed your gross income from that trade or business. Gross income and deductions from a trade or business consist of net income generated from Schedule C, Schedule F, and other business activities reported on Schedule E. Business gains or losses reported on Form 4797 are also used when computing the business loss limitation. Any excess business losses you have over the threshold that are disallowed in the current year are carried forward to be deducted in future years.

Business loss limitation rules were put into place as part of the Tax Cuts and Jobs Act in 2018. However, in an effort to relieve taxpayers of financial difficulty during the COVID-19 pandemic, these rules were suspended. Up until 2021, you were able to take the full amount of your business loss to offset other income you may have had.

Consult with your tax professional at Ketel Thorstenson about this or other tax matters because each situation is different. Don’t navigate the difficult and ever-changing tax codes and legislation on your own. Ketel Thorstenson CPAs and tax professionals receive advanced training and continuing education all year long to keep our service on the forefront of the tax industry. Call us today for guidance on tax planning tax return preparation, and tax legislation affects or questions.