Tax reform: Beware – your excess flow-through losses are now limited!

Tax reform: Beware – your excess flow-through losses are now limited!

Authored by Wesley Middleton 

There has been so much focus on the positive changes in the tax law and how we will all benefit that a few of the changes may catch taxpayers unaware. Take for instance Code Sec. 461(1)(B) that was quietly slipped into the tax bill with little attention. This change could have far reaching effects.

What is Code Sec. 461(1)(B)?

This code section is titled “Limitation on Excess Business Losses of Non-corporate Taxpayers,” and it places limits on the deduction of business losses to offset other income.

What are excess business losses?

The code defines “excess business loss” as the excess of business deductions over business income that exceeds $250,000 for single taxpayers or $500,000 for married filing jointly.

Who does this affect?

All non-corporate taxpayers; this means you! This provision could be significant for many industries but the industry that could bear the brunt of this limitation is the oil and gas industry. One of the key selling points of making an investment in an oil and gas partnership is the ability to deduct 100 percent of the of the intangible drilling costs (IDC) against other ordinary income, if structured properly.

What does this mean for me?

This means that you will only be able to deduct $250,000 ($500,000 if married filing jointly) of business losses in a taxable year. The amount of your losses that exceed these limits are carried over as a NOL separate from other NOLs that you may have.

Active oil and gas investors who have been able to take all of their losses will no longer be able to take those losses if they exceed these limits. It is common in many oil and gas partnerships to allow an investor to come into the partnership as a general partner to allow this investor to take advantage of the IDC deduction.

This is not limited to the oil and gas industry and if you are a passive owner, you have nothing to worry about as your passive losses are limited regardless of this change.

For more information on this topic, or to learn how Baker Tilly oil and gas specialists can help, contact our team.

The information provided here is of a general nature and is not intended to address the specific circumstances of any individual or entity. In specific circumstances, the services of a professional should be sought. Tax information, if any, contained in this communication was not intended or written to be used by any person for the purpose of avoiding penalties, nor should such information be construed as an opinion upon which any person may rely.  The intended recipients of this communication and any attachments are not subject to any limitation on the disclosure of the tax treatment or tax structure of any transaction or matter that is the subject of this communication and any attachments.

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