Loss Limitations Analysis: Basis, At-Risk, Passive, and NOLs

A multitude of limitations exist to delay the deduction of losses by taxpayers. Although most aim to prevent taxpayers' manipulation of losses, there are times when legitimate transactions result in nondeductible losses. Separating these allowed/deductible and unallowed/carried forward losses is complex.

Section 704(d) dictates that partnership losses exceeding basis at year-end must be suspended. The mirror provision for S corporations, Section 1366(d), states that shareholder losses are limited to the shareholder's adjusted basis in the stock plus his loans to the corporation. Excess losses are carried forward indefinitely. Although similar to basis limitations, Section 465 at-risk rules further limit losses requiring that the taxpayer be "at-risk" or personally liable for the amounts claimed as losses. The extent of this personal liability obligation is interpreted differently for shareholders and partners, adding further complications.

A deductible loss must pass through yet another hurdle--the PALs under Section 469. PALs are limited to the amount of passive income reported, so identifying passive income is critical. Understanding the interaction of basis, at-risk, passive, and NOLs is essential for tax practitioners looking to maximize loss deductions for taxpayers.

Listen as our panel of tax experts discusses the interplay of the many restrictions on loss deductions, including structuring opportunities to maximize the amount currently deductible.

1. Basis
2. At-risk limitations
3. Passive loss limitations
4. Net operating losses
5. Section 461(l) excess business loss limitation
6. Planning opportunities

The panel will review these and other notable issues:

• The appropriate hierarchy for application of loss limitations
• What constitutes amounts at risk for partnerships and S corporations
• How can activities be aggregated to avoid PAL limitations?
• When losses are carried forward, and how are losses applied to different types of income?

Learning Objectives

After completing this course, you will be able to:

• Ascertain whether inside basis, outside basis, or both are required to be adjusted
• Identify opportunities to group or aggregate trade and business activities
• Recognize the requirements for meeting the tax basis capital provisions
• Ascertain at-risk amounts
• Determine how the excess business loss is calculated
• Understand how the rules related to net operating losses are applied

• Field of Study: Taxes
• Level of Knowledge: Intermediate
• Advance Preparation: None
• Teaching Method: Seminar/Lecture
• Delivery Method: Group-Internet (via computer)
• Attendance Monitoring Method: Attendance is monitored electronically via a participant's PIN and through a series of attendance verification prompts displayed throughout the program
• Prerequisite: Three years+ business or public firm experience preparing complex tax forms and schedules, supervising other preparers or accountants. Specific knowledge and understanding of pass-through taxation, including taxation of partnerships, S corporations and sole proprietorships, qualified business income, net operating losses and loss limitations; familiarity with net operating loss carry-backs, carry-forwards and carried interests.

Strafford Publications, Inc. is registered with the National Association of State Boards of Accountancy (NASBA) as a sponsor of continuing professional education on the National Registry of CPE Sponsors. State boards of Accountancy have final authority on the acceptance of individual courses for CPE Credits. Complaints regarding registered sponsons may be submitted to NASBA through its website: www.nasbaregistry.org.

IRS Approved Provider

Strafford is an IRS-approved continuing education provider offering certified courses for Enrolled Agents (EA) and Tax Return Preparers (RTRP).