IRC Section 461(l) Business Loss Limitations: Preparing Form 461, Limitation on Business Losses

According to the IRS, though Form 461 doesn't exist for 2020, it will be issued beginning 2021.

Once gone, but now back, Form 461 per IRC Section 461(l) disallows excess business losses for noncorporate taxpayers. Excess business losses are those above $250,000 ($500,000 for joint taxpayers) after combining all income and losses from all trades or businesses for a taxpayer. This limitation is in addition to and after the passive loss and at-risk limitations already imposed on business losses.

Losses from flow-through entities combine with Schedule C and other individual income and losses on the individual shareholder's or partner's return. Net operating loss carryforward deductions are limited to 80 percent of taxable income or the carryover amount, whichever is less.

The form itself is only 16 lines, and the instructions are just two pages. Fourteen of the amounts on the 16 lines come directly from the 1040 or are simple calculations from preceding lines. On line 10, however, you enter income not attributable to a trade or business, and on line 11, you enter deductions not attributable to a trade or business. Understanding what to include on these two lines is key to calculating the allowed loss.

Adding to the complexity of this calculation is that explicitly following the instructions for inputting capital losses on Form 461 will, in some cases, generate a different result than intended under Section 461(l).

Listen as our panel of experts explains the amounts included on Form 461, the intentions of Section 461(l), carrying over business losses, and handling the related ambiguities.