Details of Public Law 117-2, section 9041 , Extension of Limitation on Excess Business Losses of Noncorporate Taxpayers

The Tax Cuts and Jobs Act enacted a business loss limitation, restricting a noncorporate taxpayer’s losses to $250,000 ($500,000 in the case of a joint return) for tax years 2018 through 2025. Excess business losses are disallowed for the taxable year and are carried forward and treated as part of the taxpayer’s NOL carryforward in subsequent taxable years. An excess business loss for the taxable year is the excess of aggregate deductions of the taxpayer attributable to the taxpayer’s trades and businesses, over the sum of aggregate gross income or gain of the taxpayer plus a threshold amount.

Section 2304 of the CARES Act temporarily suspended this loss limitation, allowing taxpayers to deduct excess business losses arising in taxable years 2018 through 2020. This section extends the limit on excess business losses for one year, through taxable years beginning before January 1, 2027.

Under the PITL and CTL, California conforms to IRC section 461 as of the specified date of January 1, 2015, with modifications.

California has modified conformity to IRC section 461(l), relating to limitation on excess business losses on noncorporate taxpayers, for taxable years beginning after December 31, 2018. For California purposes, losses are treated as an excess business loss carryover to the following taxable year as opposed to a net operating loss carryover under IRC section 172.