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

Recording of a 110-minute CPE webinar with Q&A

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Conducted on Wednesday, August 26, 2020

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Course Materials

This course will discuss the hierarchy of basis, at-risk, passive loss limitations (PALs), net operating losses (NOLs) limitations, and steps to avoid and mitigate the limitation of losses for owners of partnerships and S corporations.

Description

A multitude of limitations exist to delay the deduction of losses by taxpayers. Although most aim to prevent taxpayer's 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. The excess business loss limitations under 461(l) are temporarily suspended until tax years beginning after Dec. 31, 2020. NOLs can be carried back (for the 2018, 2019, and 2020 tax years) or carried forward and deducted. 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.

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Outline

  1. Basis
  2. At-risk limitations
  3. Passive loss limitations
  4. Net operating losses
  5. Planning opportunities

Benefits

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 passive loss limitations?
  • When losses are carried forward, and how are losses applied to different types of income?

Faculty

Hadwen, John
John Hadwen, CPA
Principal
Baker Newman Noyes

Mr. Hadwen leads the firm’s tax practice’s Partnership/Subchapter-K group. He specializes in federal and...  |  Read More

Reach, Margaret
Margaret Reach, CPA
Senior Manager
MBAF Certified Public Accountants

Ms. Reach has been in the public accounting profession since 2011. She provides tax compliance and planning services to...  |  Read More

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